Tag Archives: Inflation

Ben Bernanke: Taking Credit for the Good and Not the Bad

With Fed Chairman Ben Bernanke testifying today before the house budget committee let’s take a look back at what has transpired since QE2 was first rumored.

Rumors of QE2 started last August at the Fed’s annual Jackson Hole meeting but didn’t officially start until November. Prior to the official announcement the New York Fed’s Brian Sack had the following to say about the intentions of QE2:

keep longer-term interest rates lower than otherwise by reducing the aggregate amount of risk that the private markets have to bear. In particular, by purchasing longer-term securities, the Federal Reserve removes duration risk from the market, which should help to reduce the term premium that investors demand for holding longer-term securities. That effect should in turn boost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities.

Basically the Fed was attempting to lower interest rates with the hope that this would boost the economy and boost other assets. As you can see in the chart below Read more of this post

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Sweden’s Central Bank is Still Ahead of the Curve

In the early 1990’s Sweden had a financial crisis not unlike the U.S. financial crisis of 2008/2009. With its banking system effectively insolvent Swedish officials pursued a different strategy than the U.S. bailout model. The equity holders in Swedish banks were for the most part wiped out and troubled assets were written down to current value. Only then did the government step in. Essentially the Swedish plan called for banks to take their lumps all at once and set the stage for future growth. Contrast this to the way Japan and the U.S. have handled their respective asset price inflation induced financial crises. Under these plans the government does assume some of the troubled assets but full writedowns were not taken in the hope that the banks earn their way out of danger over time. As can be seen from Japan’s experience this does not set the table for a robust recovery.

Now, according to Bloomberg, Sweden’s central bank is thinking about how to prevent the next asset price bubble. Instead of setting policy strictly based on traditional inflation measures they are beginning to incorporate asset prices and lending growth into the decisions.  Read more of this post

Assets Returns Since QE2 Hints

A very nice interactive tool today from Reuters that shows asset returns based on different QE2 related time periods. Link.

Notice how most assets rallied from the Jackson Hole speech until the official QE2 announcement and the USD declined. Since the actual announcement risk assets have sold off and the USD has rallied. Interesting that the anticipation QE resulted in assets moving as the Fed intended, higher equity prices and lower bond yields, but since implementation prices are moving in the opposite direction. The question is, will this continue?

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Personal Income, Employment Cost and Implications for Inflation

Monday morning, Rosenberg, in his eponymously named economic commentary “Breakfast with Dave”, continues to point out that deflation is a bigger risk currently than inflation. He states,

There is no more significant source of inflation than the U.S. labour market and we found out on Friday that total employment costs slowed to just +0.4% in Q3 and the YoY trend is extremely tame, at +1.9%. Wages came in at +0.3% sequentially and just +1.5% on a YoY basis.

By examining today’s Personal Income and Outlays data and Friday’s Employment Compensation data (cited by Rosenberg) let’s see what they are indicating about inflation.

First of quick summary of the two reports; As of Q3’10, quarter over quarter growth rate in Employment Compensation has slowed to .4% from .5% and .6% in the prior two quarters. Consensus for Q3 was .5%. Wages and Salary quarter over quarter % change was .45%. It has remained in a tight range, from .36%-.45% from the past 5 quarters. There continues to be no strong rebound in wage increases with employment costs remaining under 2% year over year.

 

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A Supply-Siders Investment Thesis

“If you put the federal government in charge of the Sahara Desert, in 5 years there would be a shortage of sand.” ~Milton Friedman

Last week, I had the opportunity to attend a presentation titled “Around the World in 90 Days” by Dr. Victor Canto. Dr. Canto is the founder of LaJolla Economics and earned his Ph.D. in economics from the University of Chicago. He is very much a proponent of supply-side economics and in 1983 wrote The Foundations of Supply Side Economics.
It is from this Chicago school of thought that he made his presentation.

The presentation was divided into two sections; the first half covered his macro-economic outlook while the second covered his investment thesis based on this outlook. Read more of this post