Inflation, Report

By Keith Weiner

What is inflation?

Any layman can tell you—and nearly everyone uses it this way in informal speech—that inflation is rising prices. Some will say “due to devaluation of the money.”

Economists will say, no it’s not rising prices per se. That is everywhere and always the effect. The cause, the inflation as such, is an increase in the quantity of money. Which is the same thing as saying devaluation. It is assumed that each unit of money commands a pro rata share of all the goods produced, so if there are more units then that means each unit is worth less. Value = 1 / N (where N is the number of units outstanding).

There are different ways that the quantity of money can expand. It depends on what kind of monetary system you have. For example, the miners increase the quantity of gold. In free banking, the banks increase the quantity of gold-redeemable notes. In our irredeemable monetary system, the Fed increases the quantity of dollars.

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Pivotal Events

By Bob Hoye

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The Google Machine Inspires a Discussion about Inflation and Deflation

By NFTRH

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.

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

The Ultimate Financial Crisis Will Be Inflationary

By Steve Saville

I’ve read many comments to the effect that the next financial crisis will be like 2007-2008, only worse. However, the sole reason that many people are talking about a coming 2008-like crisis is because the happenings of 2008 are still fresh in the memory. Market participants often expect the next crisis to look like the last one, but it never does. Consequently, the general prediction about the next financial crisis with the highest probability of success is that it won’t be anything like 2008. It could, for example, revolve around an inflation scare rather than a deflation scare. In fact, the current monetary system’s ultimate financial crisis, meaning the crisis that leads to a new monetary system, will have to be inflationary.

The ultimate financial crisis will have to be inflationary, because deflation scares provide ‘justification’ for central bank money-pumping and thus enable the long-term credit expansion to continue with only minor interruptions. To put it another way, a crisis won’t be system-threatening as long as it can be ameliorated by central banks doing what they do best, which is promote inflation.

A related point is that a crisis won’t be system-threatening as long as it involves an increase in demand for the official money. The 2007-2008 crisis was such an animal. Like every other crisis in the US since 1940 it did not involve genuine deflation, almost regardless of how the word deflation is defined. The money supply continued to grow, the total supply of credit did no worse than flatten out, and, as illustrated by the following long-term chart, there was nothing more than a downward blip in the Consumer Price Index. However, with the stock market losing more than half its value and commodity prices collapsing, for 6-12 months it sure felt like deflation was happening.

CPI_LT_151018
Chart source: dshort

Continue reading The Ultimate Financial Crisis Will Be Inflationary

Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • Only 20 minutes to CPI!
  • This month, we are looking for something of a correction to last month’s terribly weak and surprising core CPI (0.08% m/m).
  • Recall that last month, Apparel plunged -1.6% m/m – which seems at odds with a world of higher landed costs due to tariffs.
  • The only way that would make sense is if BLS were backing out the tariffs from the retail prices, but this isn’t like sales tax – no good way to disentangle tariffs since some products have ’em and some don’t.
  • So Apparel prices are due for a bounce. That’s well-understood out there in inflation land I think.
  • The apparel plunge was the driving force pushing core goods to -0.2% y/y when it had gotten all the way up to 0.0% y/y the prior month. It’s hard to get a lot of inflation without core goods being positive!
  • Other parts of core goods remain perky, such as Used Cars and Trucks. Probably some further gains due there.
  • The core services component was also soft last month, as OER softened slightly (but it has a big weight) and medical care declined.
  • I’m starting to get less confident that Medical Care will have a big upswing because of work I’m doing in pharma inflation. But at the same time, the y/y looks like it may have fallen too far too fast. And I don’t think doctors’ services +0.8% y/y makes a lot of sense.
  • All in all, the odds I think favor a solid 0.2% or above. This would cause y/y core to reaccelerate from 2.19% back to the 2.3% range b/c we’re dropping off an 0.13% from last Sept. To get a 2.4% print on core, we’d need 0.29% or better m/m, which is a stretch.
  • …but not out of the question if last month’s surprises are totally reversed.
  • The bottom line I am really watching is core-ex-shelter, which has been rising and is the key to the next leg higher in inflation. Housing won’t carry the water.
  • We’re down to about 12 minutes here before the number and one thing I want to add: more than recent CPIs this is likely a pretty important number for the stock market. Climbing CPI –> higher rates;stocks aren’t handling that well right now. A soft CPI is really good for stocks.

Continue reading Post-CPI Summary

Update and Summary on Housing Inflation

By Michael Ashton

It’s inflation week, and so an excellent time to sign up to follow my live CPI tweets on my “premium” channel by signing up at PremoSocial. Membership also gets you access to my daily and weekly chart packages, to which I tweet a link daily on that channel. (Consider it – for only $10/month!)

It’s worth turning for a bit to look at the housing market. Shelter is a large part of what consumers spend money on, and therefore a large part of the CPI. It also happens that primary rents (if you rent your dwelling) and “Owners’ Equivalent Rent” or OER tend to be some of the slowest-moving pieces of the CPI. I’ve said many times that if you can get the direction of OER right, it’s very hard to be extremely wrong on the direction of core inflation.

Recently, there’s been some softening in home sales, and so in some quarters there has been an alarm raised that OER is about to start softening and therefore core inflation has peaked. My purpose in this article is to examine that evidence with an eye that is a bit more studied on these matters.

Continue reading Update and Summary on Housing Inflation

Inflation-Related Impressions From Recent Events

By Michael Ashton

It has been a long time since I’ve posted, and in the meantime the topics to cover have been stacking up. My lack of writing has certainly not been for lack of topics but rather for a lack of time. So: heartfelt apologies that this article will feel a lot like a brain dump.

A lot of what I want to write about today was provoked/involves last week. But one item I wanted to quickly point out is more stale than that and yet worth pointing out. It seems astounding, but in early August Japan’s Ministry of Health, Labour, and Welfare reported the largest nominal wage increase in 1997. (See chart, source Bloomberg). This month there was a correction, but the trend does appear firmly upward. This is a good point for me to add the reminder that wages tend to follow inflation rather than lead it. But I believe Japanese JGBis are a tremendous long-tail opportunity, priced with almost no inflation implied in the price…but if there is any developed country with a potential long-tail inflation outcome that’s possible, it is Japan. I think, in fact, that if you asked me to pick one developed country that would be the first to have “uncomfortable” levels of inflation, it would be Japan. So dramatically out-of-consensus numbers like these wage figures ought to be filed away mentally.

Continue reading Inflation-Related Impressions From Recent Events

Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • half hour to CPI. Welcome again to the private channel. Tell your friends!
  • Another easy comp (0.143%) versus year ago. August 2017 was +0.222%, Sep was 0.132%, Oct was 0.214%, and Nov was 0.121%. So we still have some easy comps ahead although not easy as they were. That means core should keep rising, although slower than over the last 6 mo.
  • Pretty safe economist estimate for 0.2% on core and for y/y to stay 2.3% rounded. As long as m/m core is 0.162%-0.259%, y/y will stay in that range.
  • Rents have been leveling out recently, and not providing as much upward oomph. That passes the baton to core goods and more generally to core ex-shelter.
  • Ironically, even though core goods started to accelerate before any sign of tariffs, investors I think might “look through” inflation like that, which they can explain away by saying “ha ha tariffs trump ha ha.”
  • One other item – I will be especially attentive to Median CPI this month, which jumped to 2.80% y/y last month. That looks a little like an acceleration past the prior trend (meaning 2013-2015), well past merely erasing the 2016-17 dip.
  • I should note that this month’s CPI report is being brought to you from sunny Curacao! Only 20 minutes to the number.
  • Well, 0.23% on core CPI was a bit higher than expected, but oddly got a tick higher in the y/y to 2.354%, rounding up to 2.4%. The SA y/y is still 2.3%, but NSA is 2.4%. This happens from time to time because seasonal factors change year to year.
  • Last 12 Rorschach test.

Continue reading Post-CPI Summary

From Inflation Hysteria to Curve Crazy

By Jeffrey Snider

One soft indication of how far things have gone is Bloomberg. Six or eight months ago, its newsfeed was filled with uniformly apocalyptic hyperbole over inflation. The tight labor market, according to the Federal Reserve, was going to lead to a faster and farther rate trajectory. Sparked by quickening confidence in the short part of the curve, there was just no way the long end could resist.

Then it did.

Such inflation hysteria has almost entirely subsided. Yield curve flattening will do that. Even those who never pay attention to curves are suddenly gripped by them. One has inverted already (eurodollar futures), at the very least sparking a global conversation rather than BOND ROUT!!!! where no discussion would have been necessary.

For places like Bloomberg, the one-sided hysteria has been replaced by near schizophrenia. Take individual stories whichever way, my view is more of a big data type perspective. They sound much less confident over there these days. Economists and Federal Reserve central bankers can ignore curves at their leisure, but Bloomberg has to cater to people in the markets who might wish they could but in reality cannot.

In other words, unlike for Jay Powell’s assessments there has to be some grounded basis.

Continue reading From Inflation Hysteria to Curve Crazy

Alternative Risk Premia in Inflation Markets

By Michael Ashton

I’m going to wade into the question of ‘alternative risk premia’ today, and discuss how this applies to markets where I ply my trade.

When people talk about ‘alternative risk premia,’ they mean one of two things. They’re sort of the same thing, but the former meaning is more precise.

  1. A security’s return consists of market beta (whatever that means – it is a little more complex than it sounds) and ‘alpha’, which is the return not explained by the market beta. If rx is the security return and rm is the market return, classically alpha isThe problem is that most of that ‘alpha’ isn’t really alpha but results from model under-specification. For example, thanks to Fama and French we have known for a long time that small cap stocks tend to add “extra” return that is not explained by their betas. But that isn’t alpha – it is a beta exposure to another factor that wasn’t in the original model. Ergo, if “SMB” is how we designate the performance of small stocks minus big stocks, a better model is Continue reading Alternative Risk Premia in Inflation Markets

Gold Has Barely Beaten Inflation, and That’s About Right

By Michael Ashton

Okay: I’ve checked my door locks, made sure my kids are safe, and braced myself for the inevitable incendiary incoming comments. So, I feel secure in pointing this out:

Gold’s real return for the last 10 years has been a blistering 1.07% per year. And worse, that’s higher than you ought to expect for the next 10 years.

Here’s the math. Gold on July 19, 2008 was at $955. Today it is at $1223, for a gain of 28.1%. But the overall price level (CPI) was at 218.815 in June 2008, and at 251.989 in June 2018 (we won’t get July figures for another month so this is the best we can do at the moment), for a 15.2% rise in the overall price level.

1.07% = [(1+28.1%) / (1 + 15.2%)] ^ 0.1 – 1

Continue reading Gold Has Barely Beaten Inflation, and That’s About Right