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Thursday, March 15, 2012

The Game's Afoot

Ben's wandering around wondering what happened? He looked for inflation and could not find it. He looked and he looked under every rock and into every cranny, and still he could not find it. He put up posters on telephone poles and wandered around the neighborhood calling "Here 'Flation, here Flation!" Flation did not respond.

He should have been looking at NFIB Small Business actual and planned compensation, price plans, etc. No can hire or keep employees at current wages because employees can't afford to drive to work.

Empire State found it:
The prices paid index rose a steep 25 points to 50.6 in March, suggesting that manufacturers observed a sharp increase in input costs. The last time the index was this high was in summer 2011. The prices received index inched down two points to 13.6, suggesting a modest increase in selling prices.
BIS paper on Op Twist and Treasury funding implications. Any fool can look at the auctions this year and see that Treasury is back to funding short.

Still rising, too. Amity Schlaes horror.

We're actually into the wage-price spiral right now, although it appears unlikely to be self-sustaining.

Now the Fed has to buy a whole LOT of long bonds to suppress this. Like immediately. If it goes even a few weeks, it may be too late. We're in a situation in which marginal improvements in the economy should shoot inflationary pulses through the economy at lightning speed. Oh, yeah, did I mention ECB cash?

The really cool thing about this is what it should do to mortgage rates, which is not in the Fed's plan, Stan. Wells Fargo is borrowing at what?

The weirdest part about this is that there is no mean within current norms. Rates can shoot real high pretty quickly and then they can drop really low pretty quickly, but I can't construct much of a situation in which Mr. Market reaches any sort of stability, because the "fixing" done in the economy has really produced a huge instability. It's like driving a badly misaligned car down the road - if you want to go straight you have to either steer hard left or steer hard right. The problem with ZIRP is that it's not exactly going to return to a stable mean in an economy like this, now is it?



These are nonfinancial rates.

Comments:
Sez Ms. Schlaes:

The reason that markets haven’t jumped yet is that...most adults in the financial markets don’t remember it [the 1970's].

Really? Seems like all I hear is that we're going to get inflation like the 1970's. Or is it that we're in an essentially deflationary environment due to demographics, and it takes monumental mistakes to get inflation going.

Not that the Fed hasn't made monumental mistakes...
 
Thanks, MOM.

I visit everyday, don't say thanks often enough.
 
Back in 2009, future Vice Chairwoman of the Fed said, "Monetary policy fosters inflation when it loosens the stance of policy enough to create excess demand for goods and services". She received her Ph.D. from Yale in 1971, though I'm not sure how much she studied the stagflation of the 1970's, that period with weak demand and wait for it....inflation.
Thanks MOM

Anon PA
 
I believe there's only $1 trillion of debt longer than 10 years so the Fed can mop that up pretty easily if it wants.
 
Neil - well, it's somewhat like Obama's situation. The old cures don't work very well, because the economy has been boosted once too often.

Shtove - I derive a lot of pleasure or at least ease of spirit from having company with which to contemplate this witches' brew.

Anon PA - well, it depends on how you define inflation. The consumer has one point of view, and the economist has another sometimes.
 
CF - Doesn't the fact that the Fed can pretty well guarantee that the Fed will? Or maybe I am wrong about their thinking. I think the Fed very much wants to hold the 7-10 year rates down because of their effect on mortgages.

I also have watched the Treasury auctions carefully, and it seems obvious that Treasury is being careful about the situation.

For any reading who aren't familiar with our current maturity distributions, read the GAO audit.
 
MOM,

Anon PA - well, it depends on how you define inflation. The consumer has one point of view, and the economist has another sometimes.

And the hard math people seem to have yet another point of view. Just a theory of course.

The Truth Behind February's "Strong" Retail Sales Report

I waited until the CPI came out to offer an opinion on February's retail sales report. How much was driven by inflation? As seen in my chart, I would argue that up to 97% of it was in one form or another.
 
I think the Fed very much wants to hold the 7-10 year rates down because of their effect on mortgages.

MoM,

Since you more in tune with this than I, do you think the 30-year mortgage is slowly losing market share? I get the feeling, though I have no data, that any "prime" borrower these days is looking at 15's or shorter. The low volume in the stock market tells me that people are no longer confident in taking a 30 and putting the rest of the money from the lower payment into stocks. There's also such a fear of being underwater that people who can borrow for a house want to build equity faster.

If I am wrong, please correct me. If I am close to correct, then is the Fed's focus on the 7-10's reflective of a mortgage market that no longer exists?
 
Charles- yes, it is somewhat. As you point out, people just aren't certain that borrowing more money to put more money on the stock market is really a winner.

But don't forget the ages of the mortgage-holding population. If you are older and beginning to think about retirement, paying down the mortgage is a priority right now, and it does give you a guaranteed return above that you can get from Treasuries.
 
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