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Transcript: “What the Money Velocity Comeback Means for Inflation, and Investors”
Episode #50 of the Inflation Guy Podcast was well-received. In particular, my analogy of the car-trailer-spring system to explain why velocity is doing what it is doing garnered some strong positive feedback. Several people suggested that I publish a transcript, for those people who would prefer to read it (or who don’t know I do a podcast). What follows is a somewhat-edited version of the podcast. I took out a lot of “um” and repeat words, and the usual sorts of things that you’re embarrassed to see when you read a transcript of what you said. I tightened it up a little bit in some places and added a clarifying word here and there in brackets. But for the most part, it’s true to the original.
If you have any questions, ping me. And subscribe to the podcast, follow me on Twitter @inflation_guy (or subscribe to the private Twitter feed), or hmu to talk about how we manage money at Enduring Investments for individuals and small institutions.
Hello and welcome to Cents and Sensibility, the Inflation Guy Podcast.
I am Michael Ashton, I’m the Inflation Guy, and I’m your host. And today we have Episode 50 of The Inflation Guy Podcast and I’m going to return to money velocity because we had data out today for the fourth quarter of 2022 and there was a significant move higher in money velocity. I’ll get to that in a bit and talk about the implications that we should take away – the practical implications for what this means.
But I want to talk about this because it’s sort of become de rigueur among certain bond bulls to point at the massive drop that we had in money velocity that coincided with the massive increase in M2 during the COVID-crisis response. And those bond bulls say that velocity is permanently impaired and so the velocity plunged and it’s never gonna come back. And so it successfully blunted the importance of the massive rise in money. But we don’t have to worry about about that ever coming back. We don’t have to worry about it from now on.
This is obviously crucial to the case for lower inflation because that case basically boils down to: money growth has rapidly decelerated – it’s been negative over the last…I think it’s negative over the last 12 months now. But for a while it’s been flat to negative and so “therefore inflation will fall.”
That’s only true, though, if the sharp fall that we had in velocity is not reflected in now having a sharp rise in velocity at the same time that the sharp rise in money is being mirrored by insufficient money growth or money supply decline.
So if money…that spike now comes back and velocity plunged but doesn’t come back, then that’s the case for why we had some inflation, but not as much as the money supply spike would suggest, and now we’re going to have disinflation (or some people even say deflation – hard to believe that though).
To believe that money velocity plunged and then isn’t gonna come back, you have to believe that velocity declined for a permanent reason. But it didn’t, and that’s the bottom line here: that’s not how velocity works.
[This podcast] Episode 10 was about money velocity…and Episode 30. [Periodically in] this podcast [I have] also talked about how money velocity had turned higher last summer; at the time it was just sort of a the beginning of a turn higher. But in this quarter, the quarter just completed – the fourth quarter of 2022 – the velocity of M2 rose at an 11.4% annualized rate (which means it went up 7.3% for the whole year).
That happened, naturally, because we had money supply down while we had fourth quarter growth – real growth “Q” – that was positive, and obviously an increase in prices as well. So your PQ side of things was quite positive for the fourth quarter and M declined. And since velocity is essentially a plug number, it means velocity had to go up a lot to balance the left side of that equation, the MV=PQ equation.
Essentially, what’s really happening with velocity and the reason that velocity sort of had to come back – obviously it’s a plug number, but here’s the bottom line story of why velocity plunged. It wasn’t any permanent impairment. You should think about it this way:
You have a rapid-moving variable in in the money supply which spiked all of a sudden and you have a slower-moving variable, which is prices (because it takes time for people to change prices and for that price change to be picked up in the survey measures at the BLS and so on). And so that’s sort of like you have an automobile attached to a trailer, but instead of having a sort of a fixed rig that is attached to the trailer, you have a spring. So as the car moves away…the car goes into gear and starts to pull away. It’s moving faster than the trailer and so the spring stretches and eventually the trailer starts to move and eventually comes along. And as long as the car doesn’t continue to accelerate forever, eventually that spring will compress again and the trailer will catch up.
In fact, actually that analogy is so apt in this case, I wonder if you can’t model the whole situation with a k constant, like you would with spring physics. Because the analogy is very good. Essentially what’s happening is that, you know, money supply went zooming away and prices came along, but they came along more slowly. And so now the car is sort of sort of decelerating and the trailer (prices) is catching up to the spring, which is money velocity is starting to go back the other direction.
It’s best to think about this…and I mentioned this in the other times that I’ve talked about velocity…it’s best to think about this as being caused by (if you have to think about in terms of a cause: obviously it’s mainly a quantitative thing that sort of has to happen because we have two variables that are moving in two different paces)…it’s best to sort of think about that as being caused by precautionary demand for cash. Which is kind of what happened, right?
So, during the crisis, the government dumped tons and tons of cash into everybody’s accounts and it wasn’t spent immediately. It took some time to spend it.
So why wasn’t it spent immediately? Well, part of it was people had to figure out what to spend it on, but part of it was it was a scary time and so people figured, “well, maybe I’ll hang on to this a little while or maybe I’ll use it to pay off some debts or whatever.” It took a while for it to actually be spent until people’s financial situation got stressed enough that they had to go dip into the money that they swore they were gonna save…or what have you.
That’s the way I have modeled this is as a precautionary demand or a demand [for liquid cash] based on fear and concern about things. But the real reason is that this happened so fast, the money was flushed so fast into the system that there just was no way that prices could really respond that quickly.
Now the bottom line here is that velocity is not permanently impaired. In fact, it should rise with interest rates, as interest rates go up. And that is in fact kind of what’s happening…although I think most of what we’re seeing is this decline in the precautionary demand, but some of it is that with higher interest rates, there are more opportunities to do something other than hold cash earning zero. There’s some opportunities to take that away from true cash balances and checking balances and stuff and put it into term deposits and stuff like that.
And that means that velocity is going to come back (and it is), and that means that prices will eventually have to catch up with the car, right? The trailer eventually has to catch up with the car.
Money supply has risen since the beginning of this crisis, something around 40%, which means that prices are going to have to go up something in that neighborhood.
Actually, if velocity was unchanged over the entire length of this period and money supply only went up 40%…if you want to know how much prices are gonna go up, you have to divide the increase in money supply (that’s 40%) by the increase in GDP, whatever that turns out to be. So if GDP is up 10% then we need to see prices up an aggregate of 30%-ish or so. And so that’s sort of where I think we’re eventually going to go.
So what’s the takeaway? What does that mean, and what should you do about it?
The important takeaway is that while we are past peak inflation for now, there’s no sign that we’re going to crash back to 2% anytime soon. If in fact money velocity had not initially plunged – if velocity had been flat through this whole period – then I would be looking at the [recent] decline in the money supply growth going down to zero, and even negative, and I would say, “look, inflation should be coming down hard here; it should be going negative.” The problem is that we still haven’t had the rise in prices that you would have expected from the initial rise in money. Where that shows up is [in] that velocity plunge and [it] hasn’t come all the way back over the long haul.
The level of prices, as I said, is closely related to the level of M2 over GDP. And that’s just a consequence of the algebra of MV=PQ. So since 1990 that…well, let’s just go back further.
If you go from like 1959 to 1991, about 32 years, that relationship was super tight. M2 over that time period roughly tripled: it was up 286%. Sorry, roughly quadrupled. I’m sorry: M two divided by GDP was up 286% And the GDP deflator was up 303%. So they both roughly quadrupled over that time frame. Since 1990, that tight relationship has been less tight, which has shown up as a lot of velocity volatility.
Now, this is not irrelevant, volatility. Some of it is because there’s a changing definition of money; M2 and M1 have kind of become blurred over time. Some of that volatility is an error in measuring nominal GDP. Some of it, and maybe most of it, is excessive Fed activism on interest rate management…you know, pushing interest rates for example artificially too low since the Global Financial Crisis, which artificially depressed money velocity and so on.
But the basic relationship over a long period of time is still there. There are people out there who sort of adjust money supply in certain ways to get a better fit and I’m just I’m just not super comfortable that I know exactly the right way to do that.
I’m looking at the big picture here and I know if M2 divided by GDP goes up a lot, then we should have prices go up a lot.
Anyway, the bottom line is that inflation is not going to crash back down. We still have a lot of potential energy in the system that is pushing prices higher. And that means that market expectations of inflation are too low right now. The inflation swaps market is pricing that by June we’ll have year-on-year inflation back to 2.16%, which would just be an amazing crash back down without gasoline plunging back down. That would be truly, truly amazing. And 10 year inflation expectations, as measured by breakevens (the difference between 10 year nominal treasuries and 10 year TIPS, the difference in those yields), is 2.3% right now. That’s just crazy. Tthose expectations are just too low unless velocity’s permanently impaired.
And what that means practically for you, the investor, is that if anything you should be overweight (still) inflation hedges even though inflation is coming down from its recent peak. At the very least you should be no worse than flat – you shouldn’t be short inflation here.
You probably should be in inflation-linked bonds still rather than nominal bonds. [There are] a couple of different reasons for that, but one of them is that right now inflation-linked bonds, or [rather] the nominal bond market, is pricing inflation way too cheaply. Inflation-linked bonds will give you actual inflation and it’s likely to be higher than what’s being priced in the nominal bond market.
Real estate, commodities…all these things which are classic inflation hedges are probably still good here,even though inflation is coming down. In general, equities are not good in that kind of circumstance, but if you’re going to be in equities – and everyone tends to hold some equities – you should look for firms with pricing power. What does that mean? Hell if I know what “firms with pricing power” means exactly. Everyone thinks they have pricing power until they don’t, and they think they don’t have it until they try it and discover that they do, right?
Right now, all kinds of firms do have power to raise prices and many of them are raising prices. So it’s hard to tell which ones are the ones that will be able to keep raising prices to keep up with the input cost pressure (largely wages) that they’re going to continue to have here going forward.
Which companies have the ability to sort of stay ahead of that? I’d say in general, you’re gonna look at firms that have a lower labor content, because commodity prices have come down…or they’re going up less fast, I guess. But labor rates continue to rise rapidly and probably will for some time.
I think firms with domestic supply chains are probably better off, or at least North American supply chains, are probably better off than the ones with long international supply chains.
I think that maybe something like apartment REITS could be interesting, especially because everybody was so convinced that that real estate was going to collapse – and it’s clearly not collapsing. Rents is something that tends to keep up with wages over time. Maybe rents have gotten a little bit ahead of themselves, but I think that the decline or the deceleration in rents is probably already kind of priced into those markets.
As always, by the way, podcast musings should not be construed as recommendations.
You know, I try to avoid mentioning specific tickers all the time because I’m an advisor and that gets sticky because if you recommend, say, Tesla, [then] you have to then give all the reasons why Tesla might go down and, you know, there’s all kinds of rules about that. So I try to not spend a lot of time recommending specific securities. But you know, you can always become a client! And we can talk all about it. Or you can send me email at inflationguy@enduringinvestments.com and we can have some conversations about that, but the bottom line is that you shouldn’t be letting your guard down.
Money velocity has been coming back for a while; it’s starting to come back more seriously. Even though money supply is declining, or flat to declining, it does not mean that inflation is going to plunge back to 2% because we have this potential energy that’s still working its way through the system. There’s no sign that velocity is permanently impaired.
So, don’t let your guard down. Defend Your Money! …and if inflation is coming for you, remember: you know a guy.
The Quintillion-Dollar Coin
I was going to write a technical column today about how the sensitivity of bonds (and consequently, lots of other asset prices) to interest rates increases as interest rates decline, and discuss the implications for equity investors nowadays as interest rates head back up. That article will have to wait another week. Today, I want to just quickly dispense with a really silly idea that keeps making the rounds every time there is a standoff on the debt ceiling, pushed by the same guys who think Modern Monetary Theory (MMT) will work (even though we just tried it, and it didn’t).
The idea is that, thanks to a law passed back in the 1990s, the Treasury has the right to issue a platinum coin of any denomination. Ergo, it could produce a $1 Trillion coin, deposit it at the Federal Reserve (who does not have the option to not accept legal tender, Secretary Janet Yellen’s recently-voiced concerns notwithstanding), and continue to pay the government’s bills. Why? One well-traveled and entertaining simpleton started explaining the reasoning for doing this by saying “there’s this silly, anachronistic and ineffectual law on the books called the Debt Ceiling…”
If we started doing really really silly, not to mention stupid, things to get around every law that we thought was silly and anachronistic, legislators would be busy 24 hours a day, 7 days a week. (And, obviously, the law isn’t “ineffectual”; if it was then we wouldn’t need to get around it.)
I am continually amazed by how durable the really stupid ideas are. For instance, the notion that the government is lying about inflation to the tune of 6% per year is an idea that never seems to die even though you can show with basic math that it can’t possibly be the case. So, let’s dispense with this one even though I am sure I will have to keep slaying this dragon when it inevitably comes back from the dead.
A useful tool of logic that’s handy when you are trying to smoke out a dumb idea is to ask, “If that works, why don’t we do lots more of it?” Let’s not try to figure out why a $1 Trillion coin is a bad idea. Let’s try to figure out why a $1 Quintillion coin (a million trillions) is a bad idea.
After all, if we are going to mint a coin anyway, it doesn’t cost much more to stamp “Quinti” than it does to stamp “Tri”. And if the Treasury minted a Quintillion-dollar coin and deposited it at the Fed, it would be much more significant. With that balance, the Treasury could pay off all outstanding debt, fully fund Medicare and Social Security, and cancel all taxes basically forever while also dramatically increasing services! Why isn’t that a better idea? I spit on your Trillion-dollar coin.
Naturally, that would be a terrible idea and it’s now obvious why. I can think of several reasons, but I’ll leave most of them for other people to highlight in the comments. The immediate one is that by paying off all federal debt, increasing spending and decreasing taxes to zero, the money supply would increase immensely and immediately. As we saw quite recently, the result that rapidly follows is much higher inflation. Much much higher inflation. I will see your 8% and raise you 800%. Yes, to some extent that would depend on the Congress deciding to do that spending and cut those taxes – but do you doubt that would happen? And the Treasury offering to buy back all of the outstanding bonds wouldn’t need Congressional authorization. That’s trillions in money being suddenly returned to bondholders, which puts it back in circulation.
A trillion here, a trillion there, and pretty soon you’d be talking real money.
One Experiment Ends and Another Begins
Today the Federal Reserve hiked rates 75bps, the biggest single-meeting increase since 1994. Two days ago, the markets had incorporated an expectation for 50bps. After a well-placed Wall Street Journal article that somehow everyone on the Street knew was a warning from the Fed, the markets immediately priced 75bps. I’ve never seen anything so dramatic, nor as blatantly insider. Giving weight to a “Fed mouthpiece” journalist who is assumed to have great sources at the Fed is a time-honored tradition. But I have never seen the entire market re-price with a virtual 100% certainty overnight based on a news article (especially when the last thing the Chairman had said on the subject of 75bps was fairly dismissive, not long ago). Ergo, I’m fairly confident that the article was only the public whisper. We will never know, and they like it that way.
Cynicism aside, today marked an important moment when the central bank finally admitted that inflation is higher and likely will stay higher than they previously have assumed (gone from the statement was a note that “the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong”), rates will have to go higher – although they still don’t anticipate raising rates above inflation, according to the ‘dot plot’ – and that they probably can’t make this omelette without breaking some eggs.
Powell still refused to cop to the fact that this was a total policy error, and completely identifiable in real time. It’s always amazing to me that when policymakers make massive errors they always seem to think that no one saw the mistake coming. Greenspan said that about the tech bust. Bernanke said that about the housing bust.
But this was more than just a mistake. This was an intentional policy decision that was driven by a seductive but completely idiotic theory: the idea, promulgated by Modern Monetary Theory acolytes, that if the economy is not at full employment the government can spend any amount of money and the central bank can print it, and it will not cause inflation. The last two years were an experiment, testing that proposition. Massive government spending, financed by bond sales that the Fed promptly bought, was nothing more than MMT and lots of people said so at the time, including this author. In January 2021, right after the first stimmy checks went out, I wrote this:
So I expect that as things go back to normal, inflation will rise – and probably a lot.
This is the test! Modern Monetary Theory holds you can print all you want, with no consequences, subject to certain not-really-binding constraints. The last person who offered me free wealth with no risk was a Nigerian prince, and I didn’t believe him either. I will say though that if MMT works, then we’ve been doing monetary policy wrong for a hundred years (but then, we also leached people to cure them, for hundreds of years) and all of our historical explanations are wrong – and someone will have to explain why in the past, the price level always followed the GDP-adjusted money supply.
…and I’d also said something like that in November 2020. And in March 2020. And I certainly wasn’t alone. The meme that “MMT” stood for “Magic Money Tree” was well-traveled.
So this is in no way unforeseen. The prediction in advance was that this behavior would provoke very high inflation. And the MMTers said “pshaw.” They were wrong, and that experiment is over. The next person who mentions MMT, you are entitled to run out of town on a rail.
That’s the good news. [I will say that I did not believe the Fed would get religion this quickly, but then they also haven’t been punished by asset markets yet for turning hawkish. Still, I didn’t really think the Fed would get to 1% before they’d start reversing course, and I was definitely wrong on that!]
But now the bad news. We are starting a new experiment, and unlike the last one this experiment isn’t as obvious. The Federal Reserve is now, for the first time, trying to control high inflation by changing only the price of money, with no pressure at all on the quantity of money. Always before, the Fed changed interest rates by putting pressure on reserves. Banks that wanted to continue to lend had to bid up those scarce reserves, and so interest rates rose. As I’ve written frequently (and even talked about in my book “What’s Wrong With Money?” six years ago!), that isn’t how it’s done today. Banks live in a world where lending is not reserve-constrained at all, and only capital-constrained.
Changing interest rates, without putting pressure on reserves to drag down money growth, is an experiment just like MMT was an experiment. The Fed has models. Oh yes, they have models. Gobs of models. Given what we’ve just gone through, how much confidence do you have in their models? Here’s the thing. Raising interest rates, if banks have unlimited lending power, probably[1] means more money and not less. That’s because banks are very elastic when it comes to making profitable loans. Give them more spread, or a higher yield over funding, and they will lend a bunch of money. On the other hand, borrowers tend to be less elastic. If you’re a consumer who has an 11% consumer loan, and it goes up to 12%, is that really going to make you borrow less? Mortgage origination is one place where you’d expect to see an elastic demand response to higher rates, but less than you might think when home prices are rising 15% per year. In short, if you don’t restrain banks by pressuring reserves, I suspect it’s very likely that you get more lending, not less, with higher interest rates.
But we don’t really know one way or the other.
What concerns me now is that at least with MMT, we knew it was an experiment. It may have been a stupid experiment, or merely an excuse to do ‘transformational’ things in response to the COVID recession, but we knew we were doing things we had never done before. When we talk about interest rate policy, though, there aren’t a lot of people who think the Fed is doing anything new. People think that the Fed always operates by raising interest rates, because we “know” that “tightening policy” is synonymous with rate hikes. The problem is, that’s a mental shorthand. That isn’t, in fact, the way the Fed has historically operated. When the Fed was doinking around with inflation between 1% and 3%, the precise mechanism didn’t really matter – the Fed’s actions probably didn’t have any meaningful effect one way or the other. Now, however, we are in a dreadfully important time. There’s a reason that NASA tests rockets without anyone aboard, before they strap anybody to it. We, though, are all involuntary participants in this experiment.
Hope it ends better than the last one.
[1] Fine, fine, this is speculation on my part too because I haven’t done it either. But my forecasting record is better than the Fed’s.
Money Illusion and Boiling Frogs
“Twice a day we are all forced to await the quotation of the Zurich bourse. Every fresh drop in its value [of Austrian kronen to Swiss franc) is followed by a wave of rising prices … The confidence of Austrian citizens in the currency administration of the State is shaken to its foundation. The State which is perpetually printing new banknotes deceives us with the face value … A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one’s purse the article one had intended to buy at the price one had intended to pay.” – account of Frau Eisenmenger, recounted in When Money Dies (Adam Fergusson).
“Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights … My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me … it already amounts to millions.” – Ibid.
These two passages come from the contemporaneous observations of an Austrian living through the early stages of the hyperinflation that followed WWI in that country. I don’t for a minute mean to suggest that the global economies are on the verge of hyperinflation, but I present these as an apt illustration of a concept called money illusion. In the first passage, the writer makes plain that the kronen is buying less and less, in terms of real goods, every day. Similarly, it buys less and less in terms of equity shares. The former, we tend to regard as a negative, and the latter as a positive, even though they are both related in this case to the same phenomenon: the unit of measurement is losing its value, so that it buys less real stuff as time passes. Isn’t that interesting? For someone who is continually investing in the equity market – I’m looking at you, millennials – higher prices should strike us as a bad thing just as higher car prices strike us as a bad thing.
I don’t mention that, though, to suggest that equities are a great place to hide out from inflation. In fact, they’re a pretty lousy place: as inflation rises the multiple paid on earnings declines so that even if nominal earnings are rising with inflation equity market prices can’t keep up. That’s not as bad as holding paper money and watching it go to zero, but it ends up being about the same when the inflation gets serious enough that the market itself collapses – as it did in each example of monetary hyperinflation (Germany, Austria, Zimbabwe, etc) that we have seen to date. But again, it isn’t my purpose today to warn about the dangers of treating equities like real assets when multiples are at nosebleed highs.
The interesting part is the money illusion. The writer in the passages above is uneasy, because while she is making millions she understands that those millions are losing value almost as fast (and ultimately, faster) than she can make them. But for a while the higher and higher prints of the market, the rising value of one’s home, and the accelerating increase in wages makes people feel wealthier. And wealthier people are happier and tend to spend more of the marginal wealth, when that wealth is real. But in this case the wealth is an illusion, because that additional wealth buys (at best) the same amount it did previously.
In classical economics, we would call spending more in this circumstance – despite having a similar claim to wealth in real terms – irrational. Although we use dollars to translate our labor into the things we want to buy, we all understand that we are really trading our labor for those things – it’s just that we need a medium of exchange because no one wants to directly exchange groceries for inflation-focused asset management services. More’s the pity. So homo economicus would regard his increasing millions in the market and not feel any wealthier as he knows the units of account are growing weaker. The money dropped into his bank account through a universal direct stimulus also wouldn’t be treated as actual wealth, since if we handed everyone a trillion dollars then obviously we all wouldn’t be living like trillionaires because the people who sell goods and services would adjust their prices (if they did not, then those vendors are voluntarily decreasing their own claim to the real wealth, by accepting smaller real payments in return for the same amount of goods). Wealth is just a claim on the national product. If everybody’s nominal wealth rises, but the nation is not able to produce more units of real output, then in aggregate we clearly are not wealthier because the pie is the same size. (Now, if you hand everyone a trillion dollars except for one guy, then that guy is poorer and everyone else slightly richer. Ergo, direct cash payments to the poor are clearly a way to distribute actual wealth, especially if those who don’t receive those payments also face higher taxes. So fiscal policy here definitely shuffles the deck of the wealthy. It just doesn’t make us wealthier in aggregate.)
The question of how people behave when they see additional income that comes from a greater money supply, rather than from additional productivity/output, is crucially important in monetarism. In the quantity equation of exchange, MV≡PQ, an increase in the quantity of money and in the velocity of money (MV), which is the total nominal amount of expenditures, necessarily equals the real output times the price level of that output (PQ). The amount that is spent equals the amount that is bought. But how the right side divides between P and Q is very, very important. If there is no money illusion, then an increase in the quantity of money will primarily increase prices while output will remain stable. Shopkeepers are unwilling to part with their wares for a smaller piece of the pie in real terms. On the other hand, if money illusion is rife then producers respond to consumers flush with cash by providing as many goods and services as they can; they view the masses as having more actual wealth to spend and so output increases and prices don’t rise as much.
Unfortunately, it seems that money illusion operates primarily when the quantities involved are small, or narrowly distributed. When incremental money creation is widely distributed and significant in size, then (as the second quote at the start of this article suggests) consumers, suppliers, and investors eventually figure it out. When that happens, a change in M is almost fully reflected in a change in P, as over time it usually is anyway. So the secret of recovering from a negative economic shock by expansionary monetary policy is to boil the frog slowly.
No one involved in current policy circles is interested in boiling the frog slowly. And that means it’s not going to end well.
In this context, the current bubbly stock market looks decidedly better. The chart below shows the S&P 500 divided by M2 (and multiplied by 100 because sometimes I don’t like looking at decimals on my y-axis). Now, the S&P 500 level isn’t the purest look at the total value of the equity market, but you get the general idea here – stocks have outrun the growth rate in the money supply, even over the last year, but the new records we are hitting are mostly on money vapor.
Average-Inflation Targeting, In a Nutshell
Let the bow-tie set argue about the niceties and the nuances. Here is what I can tell you about inflation targeting so that we can all understand the debate: suppose they changed the rules of baseball in an analogous way.
A new pitcher comes in to the game. He throws a pitch over the batter’s head. His next pitch skips behind the batter. His third pitch sails 2 feet high and outside. His fourth pitch almost hits the mascot.
“Yer out!” barks the umpire. Because the four pitches averaged out to strikes. My questions:
- I don’t know that the new rule gives me any greater confidence in the pitcher.
- It isn’t clear to me how that rule would help the batter.
- Maybe this helps a bad pitcher. But I wonder why a good pitcher would need that rule.
That is all.
Trust Masters, not Models
Normally, when I write about markets, I try to point at models but there is a lot of guesswork and gut-work in analysis. When times are sort of normal, then models can be a big part of what drives your thinking. But times have not been ‘normal’ for a very long time, and this is part of what drives big policy errors (and big forecasting errors): if you are out of the ‘normal’ range, then to make a forecast or comment usefully on what is going on you need to have a good feel for what the model is actually trying to capture. You need to know where the model goes wrong.
When I was a rates options trader – stop me if I’ve told this story before – I found that I preferred to use a simple Black-Scholes pricing model instead of some fancy recombining-trinomial-tree-with-heteroskedastic-volatility-model. That was because even though Black Scholes doesn’t match up super well with reality, I at least had a good feel for where it fell short. For example, the whole reason we have a volatility smile is because real-world returns have fat tails, but pricing models like Black Scholes are based on the normal distribution. When the smile flattens, it means returns are becoming more like they’re being drawn from a normal distribution; when it steepens it means that the tails are becoming fatter. So that’s easy to understand.
If you understand why an option model works, then it’s easier to think about how to price something esoteric like an option on an inflation swap (which can trade at a negative rate, but actually isn’t a rates product at all but rather is a way of trading a forward price), and not mess it up. But if you just apply and try to calibrate a bad model – especially if it’s really complicated – then you get potentially really bad outcomes. And that is, of course, exactly where we are today.
We haven’t been ‘normal’, I guess, for a couple of decades. Central banks, and in particular the Federal Reserve, have dealt in the markets with a heavier and heavier hand. Nowadays, the Fed not only has expanded its balance sheet by trillions in a very short period of time, but it has expanded the range of markets it is involved in from Treasuries to mortgages to ETFs and now individual corporate bonds. And, since the whole point of this is because the Fed wants to make sure the stock market stays elevated (they are preternaturally terrified at the notion of a wealth effect from a market crash, even though historically the wealth effect has been surprisingly small) I suspect it is only a matter of time before they directly intervene in equity markets.[1] C’est la vie. There is no normal any more.
But at least the ‘normal’ we have had over the last decade was just modestly outside of the prior normal. Things didn’t work right according to the ‘traditional’ way of thinking about things; momentum became ascendant in a way we’ve never seen before and value almost irrelevant. We are now, though, working on a whole different part of the number line. This means that economists will continue to be surprised at almost everything they see, and it means that any model you look at needs to be informed by a good intuition about how the hell it works.
So, for example, let’s consider the money supply. Over the last 13 weeks, M2 is up at a 63% annualized rate. With two weeks left in the quarter, it looks like we will end up with something like a 10.25%-10.50% growth in the money supply for the quarter. The Q2 average money supply, compared to Q1 (important in looking at the MV=PQ equation), is going to be about 13.85% higher. That’s not annualized! Remember, the old record in M2 growth for a year was a bit above 13%, in 1976.
The current NY Fed Nowcast for 2nd Quarter GDP – keeping in mind that no one has any idea, this is as good a guess as any – is -19.03%. I really like the .03 part. That’s sporty. That would mean q/q growth of -4.75%.
If we want the price deflator to come in around 1.75% (+0.44% q/q), which is where it was for the year ended in Q1, then that means money velocity needs to fall about 16% for the quarter. (1-4.75%)*(1+0.44%)/(1+13.85%)-1 = -15.97%. If money velocity falls less, and that GDP estimate is correct, then inflation comes in higher. If money velocity falls more, then inflation comes in lower. If GDP growth is actually better than -19% annualized, then inflation is lower; if GDP is worse, then inflation is higher. We don’t need to worry much about the M2 numbers themselves, as they’re almost baked in the cake at this point.
The biggest amount that money velocity has ever fallen q/q is about 5%. But clearly, these are different times! We’ve also never seen a 19% decline in growth.
Weirdly, our model has M2 money velocity for Q2 at 1.159, which would be a 15.6% decline in money velocity. Let me stress that that is a total coincidence, and I put almost zero weight on that point estimate. Contributing to that sharp decline, in our model, is the small decline in interest rates from Q1, the increase in the non-M1 part of M2, the small increase in global negative-yielding debt, and (most importantly) a large increase in precautionary demand for cash balances due to economic uncertainty. (This is why it’s hard to get velocity to stay down at this level. The current low levels depend on low interest rates, which will probably persist, but also on dramatic precautionary savings, which are unlikely to). Small changes in money velocity will have big effects on inflation: if our model estimate for velocity was right, we’d see annualized inflation for Q2 at 4.3% or so. Here’s how confident I am in our model: for Q3, it is seeing unchanged velocity (approximately), which with money trends and the GDP Nowcast figures from the NY Fed would imply that y/y inflation would rise to 6.22%, about 17.5% annualized for the quarter. Not going to happen.
Here’s where knowing a bit about the underlying process and assumptions really matters. Velocity is effectively a plug number, in that bureaucrats are good at measuring money and pretty good at measuring GDP and prices, but really bad at measuring velocity directly. So velocity is solved for. And our model (along with every other model, probably) treats the response of money velocity to the input variables as more or less instantaneous. For small changes in these variables – movements in money growth from 4% to 6%, or GDP from 2% to 0% – the assumption about instantaneity is pretty irrelevant. The economy adjusts prices easily to small changes in conditions. But that’s not true at all for big changes. On the available evidence, many prices (if not most) accelerated a bit in Q2, which surprised almost everyone including us. But no matter what the model says, prices are not going to drop 5% in a quarter, or rise 5% in a quarter, for the entire consumption basket. Price changes take time – heck, rents don’t change every month, and it takes time to rotate through the sample. Also, manufacturers don’t tend to make large changes in prices overnight, preferring to drip it in and see consumer response. But here’s the point: the model doesn’t know this. So I suspect we will see money velocity this quarter around 1.14-1.17…not because I believe our model but because I think prices will accelerate by a little bit and I think the real uncertainty surrounds the forecast of GDP. Over time, velocity and inflation will converge with our model, but it will take time.
For what it’s worth, I think that GDP growth will be a little lower than the NY Fed thinks, for a different model reason: the model assumes that changes in various economic data can be mapped to changes in GDP. But that assumes a fairly stable price level…what they’re really mapping this data onto is the nominal price level, and assuming that the price level doesn’t change enough to matter. So I think some of the dollar improvement in durable goods sales, for example, reflects rising prices and not growth, which would be manifested in a slightly lower GDP change and a slightly higher GDP deflator change.
What does this mean and why does it matter?
For one thing…and you already knew this…models are currently trash. They mean almost nothing by themselves. You should ignore it all. I give very little credence to the NY Fed’s forecast. I am pretty sure Q2 GDP growth will have a minus sign, but I couldn’t tell you between -15% and -25% and neither can they. Which is why the -19 POINT OH-THREE is so sporty. But by the same token, you should listen more to the model-builder, and to people who understand what’s going on behind the models, and to people who are taking measurements directly rather than taking them from models. Because this is going back to the art of forecasting, and away from the science. We are over-quanted in this world, and we are over-committed to models, and we are overconfident in models, and we are over-reliant on models. They have a place, just as the autopilot has a place when conditions are placid. When things get rough, you want a real pilot holding the controls.[2]
There used to be a couple of guys in Boston who were auto mechanics and had a radio show. People would call up and describe the noises their cars made, and the guys would ask whether it made the noise only turning left, or both directions, and whether it got worse when it was humid, and other things that sounded crazy to you and me. And then they would diagnose the problem, sight-unseen. Those are the people you want to take your car to. They’re the ones who understand how it really works, and they don’t need to hook your car up to a computer to tell you what the problem is. I took my car to them, and they really were geniuses at it. So look for those people in market space: the ones who can tell by the sound of the squeal what is really going on under the hood. They won’t always be right, but they will have the best guesses…especially when something unusual happens.
[1] Ironically, I think that something else they are considering would have a much bigger effect on equity markets than if they directly bought equities, but I don’t want to talk about that in this space because it also has big implications for inflation-related markets and would create some really delicious relative value trades that I don’t want to discuss here.
[2] Although I didn’t think I’d remark on this in today’s comment: this is also why the Trump Administration’s move today to loosen the Volcker Rule to let banks take more risks with their capital is very timely. There is a lot of bumpy flight ahead of us and we should want seasoned traders making the markets with actual capital behind them, not robots looking to scalp an eighth.
Half-Mast Isn’t Half Bad
As I watch the stock market, implausibly, rise to levels no one expected so soon after the crash, I am also sickened by the cheerleading from those whose fortunes – not to mention egos – are wrapped up in the level at which the Dow trades. Stock market fetishism always fascinates me as much as it repels me. Although my experience as a trader (and a short-term options trader, at that) would seem to suggest otherwise, my makeup is as a long-term investor. I want to buy value, and the mathematics of investing for me is that I want (a) high intrinsic value at (b) a low price. While people who are buy-and-hold investors of a certain age clearly benefit from higher prices, young investors clearly benefit from lower prices since they’re going to be net buyers for a long time. And the price at which you acquire intrinsic value matters. So does the price at which you sell, but not until you sell.
So to me, there’s nothing great about a price that’s high relative to intrinsic value, unless I am preparing to sell. In a broader sense, the idea that we should cheer for higher prices (as opposed to higher intrinsic values) is not only unseemly, but destructive and I’ll explain why in a minute. I will note that the fascination with watching prices ticking every second goes back a long ways: you can read in Reminiscences of a Stock Operator about the bucket shops of the early 1900s where speculators would watch and trade the stock market tape. The general increase in investor twitchiness and short-termism that has accompanied the growth of financial news TV, online investing, and the development of ETFs to trade broad market exposures intraday certainly adds numbers to the cheerleading crowd. But it isn’t new. Depressing, but not new.
The most fascinating example of this belief in the (non-intuitive, to me) connection between the value of the stock market and the value of ‘Merica was presented to me in the aftermath of 9/11. When we first trudged back to lower Manhattan, there were people handing out these cards:
Fight Osama! Buy Cisco! I never did see the connection, and it seemed to me at the time either delusional (the terrorists win if my investment in Lucent goes down) or nakedly self-serving. Certainly the way I feel about my country has nothing to do with where I’m able to buy or sell eBay today. And actually, they really weren’t coming for our 401(k)s, they were coming for our lives. But I digress.
The point I actually want to make is that when the Fed works to stabilize market prices, they’re having a negative effect by destabilizing economic variables. An analogy from manufacturing might be an entry point to this explanation: a truism in manufacturing is that you can stabilize inventory, or you can stabilize production, but you can’t stabilize both (unless your customers are accommodating and provide very smooth demand). If you want to stabilize inventory levels, then you need to produce more when business is high and less when business is low, so you’re on the production roller-coaster. If you want to keep production level, then inventory will be low when business is high and high when business is low, so you’re on the inventory roller-coaster. Only if business itself is stable – which is rare – can you do both.
A similar thing happens in capital markets. You can stabilize the cost of capital, but then you destabilize growth rates. Or you can stabilize growth rates, and the cost of capital (stock and bond prices) will fluctuate. This is true unless you can do away with the business cycle. If you choose, as the Fed has in recent years, to try and stabilize market prices at very high levels (stabilizing the cost of capital at very low levels), then when underlying activity is strong you’ll get a ton of speculative investment in capacity, new ventures that depend on the availability of cheap capital, and strong growth. And then when economic activity heads lower, you’ll find that lots of businesses go bust and the recession is deeper. In fact, it’s not just the speculative businesses that go bust, but the overbuilding in the expansion can cause even prudent enterprises to have more difficulties in the downturn.
The Fed’s historical response to this has been to let the speculative activity happen when the cost of capital is held too low, but not let companies go bust when economic activity wanes…so they lower the cost of capital even further.
I’m obviously not the first person to point out that the Fed’s constant intervention has deleterious effects and tends to increase the amplitude of boom and bust. And, for what it’s worth, I’m not blaming the current recession on the Fed. Clearly, the proximate cause of this recession was COVID-19 and the global economic shutdown. What made it worse was that the Fed, by holding down the cost of capital, had previously precipitated the development and preserved the success of many more speculative enterprises. And the fetishism about stock prices, and about how important it is to have lots of money “working for you” in the stock market, is also one of the reason that people don’t save enough.
Of course, right now is probably not the time for the Fed and Congress to pull back and let huge numbers of people and companies go bankrupt. There’s a case to be made for the sort of government response we are having in this episode, in which personal income is being replaced by money creation while workers are ordered to stay home. There will be a piper to pay for that policy – a loss of price stability which is a consequence of trying to preserve output stability, but a consequence that it’s arguably acceptable to pay. Afterwards, though, I hope that central banks can start to let natural rhythms replace the autocratic ones. I am not hugely optimistic on that score, but one place to start is this: stop lowering the bar for central banks to intervene in markets. Stop targeting equity prices and interest rates. It’s okay to let the Dow trade at half-mast, and the bull will come back without the Fed’s help.
In fact, if we don’t keep trying to artificially increase the length of the mast, the Dow might never need to trade down to half-mast in the first place. Certainly, intrinsic values don’t retrace 50% in a recession!
Why Bond Folks Are More Afraid of COVID-19
On Friday I tweeted a picture from our daily chart pack, and mused that either credit is too negative or stocks are not negative enough.
I spent the weekend musing about why the bond guys seem to be so negative about the effects of the COVID-19 virus compared to the stock guys. Equity investors tend to tell me things like “well, the fundamentals are pretty sound” (ignoring the role that multiples play in stock market levels), which sometimes manifests in super-dumb things like Larry Kudlow’s admonition a few thousand points ago that people should buy the dip. (By the way, all those folks who bought the dip because Larry said so…will the government make them whole? Didn’t think so. Rule to remember: never take the advice of someone who has a vested interest in the outcome.)
Meanwhile, bond investors had put bond yields at all-time lows. This is especially amazing compared to the levels that yields reached in the Global Financial Crisis; back then, a housing bubble was in the process of imploding and, since shelter is a major part of core inflation it was a done deal that inflation was going to plunge, and far (Core CPI eventually got as low as 0.6%, although it didn’t get very low at all ex-housing). So low nominal yields made sense. But today, this does not seem to be in the offing. Core inflation is more likely to accelerate with the effects of the supply shock, unless the virus gets so bad that we really do have a major demand shock. And even then it should not fall very far. So the message from the bond market is super negative on growth, and stocks are only a little off their all-time highs (at least, until tonight. Right now S&P futures are -4%, although a lot of that has to do with the collapse of energy prices thanks to the disintegration of OPEC+). So again, I wonder, why?
After long thought I think it is because bond investors understand much more viscerally the power of compound interest. Compound interest is the concept that money grows not linearly, but exponentially over time. If I start with $400 and grow it at 12% per year, here is what it becomes.
So that little $400 ends up being a really big pile of money after 60 years! From little acorns do mighty oak trees grow, and all of that. But equity folks don’t love this chart because the first 20 years looks incredibly uninteresting, not at all like Tesla. Now, if we look at this in log scale, it looks much more boring but this next chart says the same thing: stuff is compounding at 12%.
And that chart actually looks kinda similar to this chart, sourced here.
This is a plot of COVID-19 cases outside of China, and the left axis is log scale. What this chart says is that there is no sign that the rate of growth of cases of COVID-19 is slowing. In fact, its spread has been remarkably consistent since the beginning of February. Roughly, the number of cases in the US has been growing at around 12% per day. Which means that the chart looks a whole lot like the chart of $400 turning into $360,000 over 60 years, except that now it is 400 cases (Friday’s figure) turning into 360,000 cases over 60 days.
So when people say “the flu kills more people than this virus,” I know they’re equity folks. They see 400 cases and compare to 36,000 flu deaths and scoff. But that just tells me they don’t appreciate the power of compounding. Yes, COVID-19 hasn’t killed 36,000 Americans yet. But the flu kills that many per year despite the fact that (a) it isn’t generally communicable for very long outside of the period when the carrier has symptoms – which is why it’s okay to go back to school when you’re fever-free for 24 hours, (b) it has a pretty low fatality rate in the 1-2% range, and (c) almost everyone is inoculated against the flu. COVID-19 beats the flu on all three of those metrics.
That doesn’t mean that this bug will kill everyone, but it does mean that it is fairly likely to kill more than the flu unless something changes with the rate of exponential growth. By the end of May, the same growth rate would mean more than 6 million Americans have gotten the virus, which means a couple hundred thousand would die.
This is not a prediction, and I really hope that the rate of contagion slackens and the survival rate increases. I don’t know what would cause that to happen: I am not an epidemiologist. I’m just a bond guy, and I understand compounding. In investments, compounding is your friend. In disease, compounding is your enemy.
Tariffs and Subsidies…on Money
Many, many years ago (27, actually) I wrote a paper on how a tariff on oil actually has some beneficial effects which needed to be balanced against the beneficial effect that a lower oil price has on economic growth. But since the early 1990s until 2015 or so I can count on the fingers of one hand how many times the issue of tariffs came up in thoughts about the economy and markets. To the extent that anyone thought about them at all, it was to think about how lowering them has an unalloyed long-term positive effect. Which, for the most part, it does.
But the economics profession can sometimes be somewhat shamanistic on the topic of tariffs. Tariffs=bad; time for the next chapter in the book. There is much more complexity to the topic than that, as there is with almost any economic topic. Reducing economics to comic-book simplicity only works when there is one overwhelmingly correct idea, like “when demand for a good goes up, so does the equilibrium price.” The end: next chapter.
Tariffs have, though, both short-term and long-term effects. In the long-term, we all agree, the effects of raising tariffs are deleterious. For any given increase in money and velocity, we end up with lower growth and higher inflation, all else equal. It is important to realize that these are largely one-time effects although smeared out over a long period. That is, after equilibrium is reached if tariffs are not changed any longer, tariffs have no large incremental effect. It is the change in tariffs that matters, and the story of the success of the global economy in terms of having decent growth with low inflation for the last thirty years is largely a story of continuously opening trade. As I’ve written previously, this train was just about running out of track anyway so that we were likely to go back to a worse combo of growth and inflation, but reversing that trend would lead to significantly worse combinations of growth and inflation in the medium-to-long term.
In the short-term, however, tariffs can have a positive effect (if they are expected to remain) on the tariff-imposing country, assuming no retaliation (or even with retaliation, if the tariff-imposing country is a significant net importer). They raise employment, and they raise the wage of the employed. They even may raise the real wage of the employed if there is economic slack. The chart below shows the y/y change in manufacturing jobs, and ex-manufacturing jobs, for the last 40 years. Obviously, the manufacturing sector has been shrinking – a story of increased productivity, but also of trade liberalization as manufacturing was offshored. The Obama-era work programs (e.g. “Cash for Clunkers”) temporarily reversed some of that differential decline, but since 2016 – when we got a new President – manufacturing payrolls growth has caught up to non-manufacturing. That’s not a surprise – it’s the short-term effect of tariffs.
The point is that tariffs are a political winner in the short-term, which is one reason I think that people are overestimating the likelihood that “Tariff Man” is going to rapidly concede on trade and lower tariffs. If the Administration gets a clear “win” in trade negotiations, then I am sure the President is amenable to reversing tariffs. But otherwise, it doesn’t hurt him in the heavy manufacturing states. And those states turn out to be key.
(This is a relative observation; it doesn’t mean that total payrolls will rise. The economic cycle still has its own momentum, and while tariffs can help parts of the economy in the short term it doesn’t change the fact that this cycle was very long in the tooth with lots of imbalances that are overdue for correction. It is no real surprise that employment is softening, even though it is a lagging indicator. The signs of softening activity have been accumulating for a while.)
But in the long run, we all agree – de-liberalizing trade is a bad deal. It leads among other things to bloat and inefficiency in protected sectors (just as any decrease in competition tends to do). It leads to more domestic capacity than is necessary, and duplicated capacity in country A and country B. It promotes inefficiency and unbalanced growth.
So why, then, are investors and economists so convinced that putting tariffs or subsidies on money has good (or even neutral) long-term effects? When the Fed forces interest rates higher or lower, by arbitrarily setting short-term rates or by buying or selling long-term bonds – that’s a tariff or a subsidy. It is protecting interest-rate sensitive sectors from having interest rates set by competition for capital. And, as we have seen, it leads in the long run to inefficient building of capacity. The Fed evinces concern about the amount of leverage in the system. Whose fault is that? If you give away free ice cream, why are you surprised when people get fat?
The only way that tariffs, and interest rate manipulations, have a chance of being neutral to positive is if they are imposed as a temporary rebalancing (or negotiating) measure and then quickly removed. In the case of Federal Reserve policy, that means that after cutting rates to address a temporary market panic or bank run, the central bank quickly moves back to neutral. To be clear, “neutral” means floating, market-determined rates where the supply and demand for capital determines the market-clearing rate. If investors believed that the central bank would pursue such a course, then they could evaluate and plan based on long-term free market rates rather than basing their actions on the expectation that rates would remain controlled and protective.
It is no different than with tariffs. So for central bankers criticizing the trade policy of the Administration, I say: let those among you who are without sin cast the first stone.
A Real Concern About Over(h)eating
I misread a headline the other day, and it actually caused a market analogy to occur to me. The headling was “Powell Downplays Concern About Overheating,” but I read it as “Powell Downplays Concern About Overeating.” Which I was most delighted to hear; although I don’t normally rely on Fed Chairman for dietary advice[1] I was happy to entertain any advice that would admit me a second slice of pie.
Unfortunately, he was referring to the notion that the economy “has changed in many ways over the past 50 years,” and in fact might no longer be vulnerable to rapidly rising price pressures because, as Bloomberg summarized it, “The workforce is better educated and inflation expectations more firmly anchored.” (I don’t really see how an educated workforce, or consumers who have forgotten about inflation, immunizes the economy from the problem of too much money chasing too few goods, but then I don’t hang out with PhDs…if I can avoid it.) Come to think of it, perhaps the Chairman ought to stick to dietary advice after all.
But it was too late for me to stop thinking about the analogy, which diverges from what Powell was actually talking about. Here we go:
When a person eats, and especially if he eats too much, then he needs to wait and digest before tackling the next course. This is why we take a break at Thanksgiving between the main meal and dessert. If, instead, you are already full and you continue to eat then the result is predictable: you will puke. I wonder if it’s the same with risk: some risk is okay, and you can take on more risk up to a point. But if you keep taking on risk, eventually you puke. In investing/trading terms, you rapidly exit when a small setback hits you, because you’ve got more risk on than you can handle. Believe me: been there, done that. At the dinner table and in markets.
So with this analogy in place, let’s consider the “portfolio balance channel.” In the aftermath of the Global Financial Crisis, the Fed worked to remove low-risk securities from the market in order to push investors towards higher-risk securities. This was a conscious and public effort undertaken by the central bank because (they believed) investors were irrationally scared and risk-averse, and needed a push to restore “animal spirits.” (I’m not making this up – this is what they said). It was like the Italian grandmother who implores, “Eat! Eat! You’re just skin and bones!” And they were successful, just like Grandma. The chart below (source: Enduring Investments) plots the slope of the securities market line relating expected real return and expected real risk, quarterly, going back to 2011. It’s based on our own calculations of the expected real return to stocks, TIPS, Treasuries, commodities, commercial real estate, residential real estate, corporate bonds, and cash, but you don’t have to believe our calculations are right. The calculation methodology is consistent over time, so you can see how the relative value in terms of risk and reward evolved.
The Fed succeeded in getting us to eat more and more risky securities, so that they got more and more expensive relative to safer securities (the amount of additional risk required to get an increment of additional return got greater and greater). Thanks Grandma!
But the problem is, we’re still eating. Risk is getting more and more expensive, but we keep reaching for another cookie even though we know we shouldn’t.
Puking is the body’s way of restoring equilibrium quickly. Abrupt market corrections (aka “crashes”) are the market’s way of restoring equilibrium quickly.
This isn’t a new idea, of course. One of my favorite market-related books, “Why Stock Markets Crash” by Didier Sornette, (also worth reading is “Ubiquity” by Mark Buchanan) talks about how markets ‘fracture’ after bending too far, just like many materials; the precise point of fracture is not identifiable but the fact that a fracture will happen eventually if the material continues to bend is indisputable.
My analogy is more colorful. Whether it is any more timely remains to be seen.
[1] To be fair, I also don’t rely on Fed Chairman for economic advice.
