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Summary of My Post-CPI Tweets
Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com. You can also pre-order online.
- +0.2% on core CPI…as expected…waiting for breakdown
- With Median CPI running 2.5% as of last month, we should be expecting 0.2% as the “normal” core going fwd.
- 20% was core to 2 decimal places. 1.91% y/y. [ed note: mistweeted as 0.19% first]
- Note that the next two months, we roll off +0.08% and +0.06% from last year. This means core will be about 2.2% by dec CPI.
- (Though there’s some evidence of missed seasonality in core CPI these days, through airfares e.g.)
- Primary Rents 3.74% vs 3.71%. OER unch at 3.09%. So Housing roughly unch at 2.12% y/y
- Medicinal drugs 2.95%, up a bit, but Hospital Services 4.87% vs 3.28% and Health Insurance 2.99% vs 1.74%.
- No big surprise that there’s a jump in medical care services if you’ve looked at your bills recently! Probably not temporary.
- core services at +2.8% mainly due to medical; core goods -0.7%, weakest since Jan.
- Apparel -1.91% vs -1.37%, a non-negligible part of core goods.
- New vehicles also soft: +0.14% from +0.47%. Some will say this is a VW effect, but also a general dollar effect.
- The dollar effect, overall, is very small but in a few categories like Apparel it is large and in cars it is measurable.
- First cut at Median, looks to me like ~0.21%, unchanged at 2.5% y/y. That’s the number that matters but not due out for hours.
- I think I mistweeted the core to 2 decimal places…was 0.20%, not 0.19%. still 1.91% y/y, I just typoed. Why? It’s a mistwee. [ed note: har har!]
- Summary is there’s still no sign of deflation! The pop in medical services inflation joins housing as concerns to the upside.
- The rise in Medical care will also tend to make PCE catch back up with core, since it has 3x the weight in PCE as in CPI.
- I don’t care about PCE, but the Fed does.
There is not a lot here to be very happy about if you want the Fed to stay on hold. The best argument for the Fed to not tighten, at this point, is that it doesn’t wanna. Growth isn’t great, and is weakening, and we may well enter a recession in a few months (we won’t know that for a year, of course, when the NABE announces it). But that won’t stop inflation from rising. Money supply growth is still rolling along at 6.7% (the highest in 15 months), but the Fed doesn’t really care about that as far as anyone can tell. At this point, the argument for the Fed to move is strong, but it has been almost this strong for a couple of years (and arguably stronger, when growth was less tenuous a year or two ago). The only argument that is stronger now is that they are even further behind the curve.
However, I am still skeptical that the Fed will tighten in December. They need to walk back their rhetoric, and I expect they will do so over the next few weeks (if they do not, then I am wrong and they will tighten in December). Even if they tighten, though, I do not expect them to tighten more than a couple of token times, before slowing growth makes them ‘pause’ – and that will be an interminable pause.
One chart here that is the most disturbing of the report: medical care services.
If you have been shopping for healthcare recently, you know that there are steep increases in insurance (which doesn’t show up very much in CPI but is more meaningful in PCE) and direct services that you pay prior to using up your deductible are also rising significantly. Medical care is a mess. For a while, the reorganization of payment streams hid the actual increased costs of Obamacare, but the real costs are starting to be felt. It may be that the cost curve eventually turns down because consumers have to pay for more of the care themselves. But this hasn’t happened yet, and it will take time. In the meantime, medical care services will add to housing services as the main pressures for higher prices.
It’s only softness in goods prices that is holding down overall core CPI now, and that won’t last forever!
Median Inflation vs Mediocre Growth
A reader pointed out to me today a piece by Amy Higgins and Randal Verbrugge on the Cleveland Fed’s website entitled “Is a Nonseasonally Adjusted Median CPI a Useful Signal of Trend Inflation?” I will let readers draw their own conclusions about the new measure that Higgins and Verbrugge are proposing, but I wanted to point out the research because I often cite Median CPI as the best way to look at the central tendency of inflation (what the researchers call “trend inflation”) and this article confirms and reinforces that point of view.
And it is worth looking, therefore, at the recent movements in Median CPI. Yes, I know you’ve seen this over and over from me, but take a look anyway (chart is sourced from Bloomberg).
I don’t believe for a second that the FOMC is unaware of this picture; nor, however, do I believe they really care equally about inflation and growth. The talk right now is moderately hawkish, and with growth fair and inflation heading higher it is time to withdraw reserves. Indeed, it is long past time. As I have said for a while, the time to withdraw reserves was roughly when the Fed was busy implementing their last QE. Also note that I am not saying “raise rates,” since raising rates is an effect of withdrawing reserves and it is the withdrawal of reserves, not the raising of rates, that matters.
Practically speaking, since growth is slowing, the Fed is now back in a pickle of its own making. Inflation is clearly heading higher; growth is probably heading lower. If the FOMC had a balanced mandate (inflation and employment equal) then they would probably be at a neutral rate right now, so that would argue for tightening. But the FOMC has nothing remotely close to a balanced mandate. Against all evidence that monetary policy can affect inflation but not growth, the Fed is totally biased to act to support growth. The bankers believe that slow growth solves the inflation problem, so they should fight recession and just worry about inflation when growth gets “too hot.” Therefore, I currently do not expect the Fed to tighten in December.
Moreover, this increase in core or median inflation is happening in most major economies (with the notable exception of the UK, where it was nearing 4% in 2011 but has gradually come back to around 1%). This is in contrast to the conventional wisdom being propagated that inflation is falling everywhere. Consider the chart below, which is of core Japanese CPI (with the effect of the one-off tax increase in 2014 smoothed out).
Core inflation in Japan is the highest it has been in more than 17 years. Seventeen years. Tell me again how the BOJ’s money printing is having no effect? It is having no effect on growth, but it is doing what we would expect it to do on inflation.
Eurozone inflation is rising less impressively (see chart), but still rising. But then, the ECB has been less aggressive on monetary policy than either the US or Japan. Still, Europe is not, as the popular press would have you believe, flirting with deflation.
All of these economies are only flirting with deflation if you include energy quotes (these pictures may be worse if we had median CPI rather than core CPI for these economies). Now, energy quotes matter, just as much when they are going down as when they are going up, but it is a separate question whether including energy is at all helpful for predicting future inflation. And the answer is, as the Higgins and Verbrugge point out: no, it really isn’t. We are entering a period with weakening growth and strengthening inflation.
This should be “fun.”
Looks Like a Hag to Me
Suddenly, things are just swell!
Over the last month, stocks have absolutely blasted off with one of the most powerful moves in years. More precisely, in this century the only months with bigger gains in the S&P than last month’s 8.3% were March 2000, October 2002, March 2009, April 2009, September 2010 and October 2011.
There is no ‘because’ – as far as I can tell, there is little coherent reasoning behind the rally. Economic data has been generally weak; there have been positive signs too but the bad signs have been getting worse faster than economists have been expecting. Nothing is collapsing, but we are talking about a market that is overvalued on most major metrics. “The economy is not collapsing” is not a strong argument for why we’ve added 10% since the beginning of October.
One fascinating argument I have heard advanced concerns the Fed’s recent hawkish rhetoric (for the record, I do not expect this to result in an increase in interest rates in December, but consider it so much wind). Stock market bulls for years have used the liquidity argument for a reason to buy stocks. But now that the Fed is preparing (or trying to make us think it is preparing) to hike rates, I read about how that’s bullish for stocks because it signals a return to normalcy. Really? So by similar reasoning, if the Fed enacted QE4 instead it would be bearish. How convenient that the logic of how liquidity helps stocks got turned around 180 degrees right about the time the Fed has few options before it other than the question of when to turn 180 degrees.
Investing, of course, is famously not about selecting the prettiest girl in the room but about selecting the girl that everyone else thinks is the prettiest. If you can get ahead of the screwy logic correctly, you can do quite well. I am awful at doing this. I simply can’t make myself think in this kind of twisted way, which is why I am a systematic value-tilted investor.
I’ve also, although only over the last week or so, heard Amazon cited as one reason the market is doing well. Specifically, Amazon reported strong Q3 growth and expects a record holiday season. But…Amazon isn’t forecasting a record Christmas for everyone; it continues to add market share in the movement from foot-traffic shopping to online shopping. It would be shocking if it were not a record Christmas season for Amazon, even if the economy contracted! In any event: show me. I suspect Christmas will be better than it has been for a few years, since Unemployment is lower than it has been for a while and gasoline prices are lower which should increase discretionary spending. (It should be noted, though, that economists have been looking for the increase in discretionary spending for a few quarters now and it hasn’t really shown up). But as an excuse for adding a couple trillion dollars in market value? Seems a bit of a stretch.
As usual, the signals are not the same away from the stock market as they are within the stock market. Commodities markets remain very weak, although energy showed some strength today. This isn’t a new divergence, though – since the commodity market diverged from the stock market in late 2011, the Bloomberg Commodity Index is down about 42% while the S&P 500 is up about 89% (see chart, source Bloomberg).
Looking at that chart, it is fair to point out that the recent dip in stocks is reminiscent of the dip in late 2011, which was also from overvalued conditions (although not nearly so overvalued as now) but which culminated in a blast-off in one of the most continuous rallies without a 10% correction the market had ever seen. It is worth pointing out, of course, that in 2011 the Unemployment Rate was at 9% and coming down, while it is now at 5.1% and likely heading up soon. We also had a further QE to look forward to (in 2013), while that looks unlikely now. And there are other differences that seem to me to carry more weight than a curious symmetry of chart patterns. But, as I said, I am awful at figuring out who everyone else thinks is the prettiest girl today. As for the stock market, it looks like a hag to me.
