March CPI once again appeared to surprise markets obsessed with putative Fed rate cuts. It came in 0.4% higher than last month and 3.5% over last March. Even the bond market, which had already been hiking rates for months, put in another steep hike this morning.
This marks the third time in a row expectations were shattered to the upside. Makes you wonder who is doing the expecting and why their failing record isn’t altering their way of thinking. It’s not that hard to suss out … they’ve been paying too much attention to the Fed and not enough to the markets.
As we’ve been saying since that fateful December FOMC meeting, and as we have for years, consumer inflation would not dissipate as long as asset price inflation was running rampant. Stock prices had already taken flight. Commodity prices turned higher the day of the meeting. The bond market began hiking rates a mere two weeks later. Yet the Fed and media insisted rate cuts were in the bag; the only question being timing. Only an Ostrich School of Economics could imagine that inflation exists only in consumer prices while asset prices have nothing to do with it.
We’ve also lampooned for years the Fed’s insistence on telling the markets what it plans to do before it does it. It clings to its so-called “forward guidance” policy tool despite repeated backfire. It tells the markets its intentions because it wants to be predictable but then has to change them because it wants to be responsive to the data. The logical contradiction doesn’t seem to bother it, and it seems equally immune to bad experience. This is a failed Fed.
The early market response is encouraging. Not a single asset on my multi-asset-class watch list isn’t in the red in terms of dollars, indicating the dollar is in the green. That’s an anti-inflation response.
Alas it’s unlikely to have much staying power. The ongoing federal debt disaster practically ensures more inflation ahead. After its initial round of tough talk and firm action, the independent Fed is already going weak in the knees, showing little stomach for resisting the pressure to inflate coming from both Wall Street and Washington.
Back in the day, we discussed the concept that the Fed would always sacrifice stocks for bonds – knowing that the market (sort of, or eventually) rules, excepting the Fed Funds Rate.
All of this seems to have been a psychological operations exercise to pad the stock market before an understood and needed decline. I think they’re smarter than we tend to give them credit for. It’s hard to image that the Fed doesn’t know that asset prices lead consumer prices.
There’s also a practical need to *force* lower market rates. The deficit is completely off the hook, and higher market rates exacerbate the deficit and debt via servicing costs. The Fed doesn’t mind the “black eye” on this “wrong call”. It now has cover for the market to dictate lower funding costs. If asset prices give (are sacrificed), the effect is muted, given their run up cushion (some of which is justified given dollar debasement).
“Transparency” be dammed. The path of least resistance in this day age (of all government operations) is PSYOP machinations. This “Fed Funds Rate cuts are coming” machination has been fairly lite, given what the DS has been up to.
Rates are up today, but this should take some pressure off rates and the Fed.
Thanks for weighing in, Chris. Good to see you again. So far this cycle the question of whether to save the stock or bond market hasn’t had to be confronted much. Both tanked in 2022. What’s come to the fore though is even bigger … saving the bond market or the currency. There is no way to do both (not that that would stop them from trying) without addressing the fiscal problem.
The holding-rates-low-to-manage-the-debt paradigm fails to recognize the circular nature of the causality. Lower rates might initially ease the debt burden but they also affect debt assumption behavior. It’s no accident that the current intractable situation emerged from an era of ultralow rate policy. Our monetary system creates money by lending it into existence. Politicians responded to ultralow rates by running up ultrahigh debt. Yet more rate suppression would be like trying to cure an alcoholic with more booze.
Where the Fed stands on the incompetence-to-malevolence scale has always struck me as an angels-dancing-on-the-head-of-a-pin kind of proposition. The results are the same regardless and mental process is an unobservable anyway. Not that it matters, but my take is that to be this bad requires a heaping measure of both.
Evidence for the former … because conventional economics is just bad, merely the latest example being the obvious across-the-board failure of the field to sniff out this resurgence in consumer price inflation, even while peanut gallery economists like me saw it coming a mile away. Evidence for the latter … that it pretends to serve the public interest while throwing it under the bus to prioritize an elite Washington and Wall Street constituency. But facts and theories can be proved or disproved, opinions not so much.
I do actually think they don’t fully appreciate the asset-price-consumer-price link. The field is dominated by statistical analysis. The lags are long, variable, and easily missed, if you don’t know what you’re looking for. A real science, like physics, would consider mechanical, cause and effect connections, and then look for supporting empirical observation. They’ve kinda sorta glommed onto it via the “financial conditions” construct, but it’s still a vague and fuzzy notion that invites merely opportunistic use.
In this instance I think Powell really thought inflation was on a glide path to 2%. Or more likely just had too little conviction to resist Wall Street pressure for a dovish pivot.
Cancer makes a decent metaphor. In Darwinistic terms, it’s very good at out-competing healthy cells, seeming to ensure its survival and growth. But it’s ultimately at the expense of killing its host and therefore itself. Stupid or evil? Angels dancing on the head of a pin.
higherer for longerer.
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in this new age of fiscal dominance, i think even we are paying too much attention to the fed. it’s fiscal driving the bus. the fed just plays at being tour guides, commenting on the scenery to entertain the passengers.
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imo there will be no cuts and no hikes before the election in nov.
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furthermore, both biden and trump are spenders, and there is no desire in anyone in washington to talk about the deficit. who votes for austerity?
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the debt is rising $1 Trillion every 100 days. we should start a pool on how high the debt goes before we trigger some kind of crisis. i’ll take the over.
Guilty as charged for attention to the Fed. It’s just such a tragicomical spectacle I can’t help but play the heckler in the back row.
We also agree on the fiscal as the inflationary elephant in the room. The Fed can still crush inflation, but only by pulverizing the private economy. It would have to retrench enough to offset public excess.
Alas I share too your skepticism that fiscally speaking the election will be between Tweedledee and Tweedledum. Trump might be a marginally lower spender and regulator, but to confuse him with a fiscal conservative would be a triumph of hope over experience. It’s merely a question of whether the fiscal ship slams into the brick wall at 150 or 120.
A lot of trouble could be avoided if the Fed stepped outside its box of irrational canon. A cut or a hike is always on the table. At every meeting. Better yet, every week. Get out of this rut where interest rates can only move in long unidirectional series. Policy actions are far too high-stakes because the Fed has to commit to a sweeping, extended move in order to do anything.
The Fed is trapped by its own insensate dogma, preventing it from routinely tweaking policy and preventing imbalances accumulating to toxic levels. Short term interest rates can move freely without fueling massive volatility if relieved of the excess baggage the Fed has loaded onto them.
Maybe we have it all wrong, and the situation is much more politically dysfunctional than we’ve imagined: https://twitter.com/JamesOKeefeIII/status/1778157381907513802
Whether or not this guy is talking out his arse, it speaks volumes to just how screwed up DC is right now. The “elites” are out of their minds.
Haha you can say that again. The social issues part would be wandering a bit far from the Fed’s bailiwick. Not even clear how monetary policy would work there.
The wealth inequality part though … yeah. The thing is the Fed’s been very active in the reverse Robin Hood business. Ben Bernanke explicitly deployed monetary policy to achieve a “wealth effect” … slash interest rates and print money to kite asset prices to make consumers feel wealthier and spend more. Less examined however is the fact that the wealthy by definition disproportionately own the assets. So the inevitable result is a transfer of wealth upstairs to the wealthy from the rest.
It’s been a smashing success.
You guys are still stuck fed watching. They are trapped, powerless, their words taken as full of sound and fury, but signifying nothing, while fiscal is out of control. The Fed is irrelevant.
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The financial world is like a magician, misdirecting our attention so we ignore what’s really going on. Wall Street needs to do this, of course, so they can still sell stocks and bonds. If everyone was focused on fiscal the money would move to commodities and real assets, and then who would be left to buy nvidia?
It’s a spectator sport for the financially obsessed;-)
Remember I’m the guy that’s been saying for years, don’t watch the Fed, watch the bond market. Although you could say that the Fed is relevant in an ex post facto kind of way. Besides its reverse Robin Hood games, the 2010s Fed contributed heavily to the 2020s fiscal disaster. “Look!” politicians could say. “Our borrowing costs are nil. Money is practically free. Let’s go big!”.
Gold update:
https://financology.net/2024/04/t/gold-is-unstoppable/#comment-3610
“We today have a disconnect between the hawkish rhetorics of central banks and the actions of governments.”
Russell Napier said that 18 months ago. He basically said that central bankers will be impotent against the will of the Govt for the next 15 years. Pretty much spot on so far.
https://themarket.ch/interview/russell-napier-the-world-will-experience-a-capex-boom-ld.7606
russell napier is a really smart guy, and way ahead of the curve. i have a google alert for his name, and get emailed a link whenever he is mentioned on the internet. i just [re]read the interview linked above, and recommend it to all. it’s just as relevant today as it was 2 years ago. one thing he got wrong, though, at least for the u.s., was predicting that industrial policy would be implemented by loan guarantees. here in the u.s. of a. we do it by direct spending and subsidies, witness the chips act, the so-called “inflation reduction act,” and so on.
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be prepared for financial repression. if you’re really interested in it, track down the imf paper, “the liquidation of gov’t debt,” by reinhart and sbrancia, from 2015. [they saw it coming 9 years ago.] financial repression is standard operating procedure for dealing with high debt/gdp ratios, and especially convenient for the issuer of the fiat reserve currency.
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watch yield curve control, either explicit [as in japan] or implicit [as expressed in the much changed distribution of paper durations revealed in the quarterly refundings, creating an implicit “operation twist”]. watch changes in regulations, e.g. as has already affected money market funds, forcing investment in gov’t paper with artificially low yields: insurers, pension funds, banks are or will be forced to hold more treasury paper. i expect ira’s and 401k’s to have mandated allocations – “for our own good,” of course. capital controls are a must, and will come in time.
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here’s a link for a rare interview with napier, from 2 weeks ago:
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https://www.youtube.com/watch?v=bkbDgNjyDTM
I haven’t seen the video, but if he’s suggesting to prepare for financial repression he’s tragically late. We’ve had it practically nonstop since 2008.
It all turns on a faulty theory of real interest rates. An article on RIA highlights the error:
Is Gold Warning Us Or Running With The Markets?
Michael Lebowitz is pretty sharp and generally has good insights, but completely misses the bus here. He observes a conflict between real interest rates and gold prices. Then in effect concludes that gold is wrong … without even considering the possibility that it’s his reckoning of “real rates” that’s wrong.
Like most of the field, he has no clue what real rates are. Convention seems to hold that you look at nominal rates and back out inflation. But interest rates are a forward measure – what you will receive in the future on an investment made today – while inflation is only known in the past. It’s like asking how many bananas will you have if you start with eight apples and subtract five oranges.
But even if you correctly align your time frames, you still have big problems. The CPI is garbage, and garbage in means garbage out. Even TIPS are keyed to the CPI. And it’s not just how CPI measures consumer price inflation, but whether consumer price inflation itself is even the relevant bogey.
What about asset price inflation? Interest rates and bond yields live first in the capital markets, where price inflation numbers are radically different.
The bottom line is the whole “real interest rate” paradigm is built on a flimsy foundation. Comparing fake real interest rates with real gold prices leads to a crapload of nonsense conclusions.
Real interest rates have been negative for most of the past fifteen years. That’s financial repression.
i agree with your criticism of the word “prepare.” as you say, financial repression has already been here for quite a while. however, it is getting ever more extreme: witness the recent radically increased proportion of bills in the last few refundings. i expect it will get even more extreme as time goes on.
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reminds me of the ’70s, when we learned to call treasuries [of all durations] “certificates of guaranteed confiscation.” [of course this then led to most of us, including me, turning up our noses to long term treasuries at 14% in the early ’80s – a mistake not to have recognized that times had changed.]
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but then, bill, what of your allocation to bonds? what kind of bonds are you in, and how do you think about or justify it?
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i have an allocation to high-yield closed end funds and business development funds, private credit and so. this stuff yields about 10%, and in recessions about 5% of it defaults, with an asset recovery averaging 60% post bankruptcy, so its yield still is well above official inflation numbers, and competitive with whatever my personal inflation rate is. i was in tips for a while, but realized they were vulnerable to both higher rates and bogus cpi numbers, so i sold and went into this high yield stuff.
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why do you have an allocation to bonds?
I figured he might have meant it was about to get more extreme, but then wouldn’t have had such a nice springboard for my real rate rant…
That it is about to get worse seems plenty plausible.
Bonds? I do not like them. My working assumption is that the four decade secular bull market ended in 2020. And given the appalling lack of interest in even tapping the brakes on federal debt, assume it will be a long time, if ever, before they’re a good investment again.
But that wouldn’t preclude the existence of trading rallies. or even cyclical bull markets. They could be launching a decent trading rally as we speak.
And even if my bearish hypothesis is correct, at least some position in bonds can be justified on at least two grounds. One is the same as I cited earlier in the case of another asset class I don’t like: The GMP template. The other is to offset the short position built into stocks. Most corporations’ balance sheets are short bonds … the main source of risk. Including a bond allocation of roughly a third of your stock allocation leaves you with just about pure equity exposure.
The kind of bonds … Treasuries … just because I have a lot of stocks and want to diversify among issuers. Corporates, agencies, munis, etc, all key off Treasuries and will tank along if Treasuries do. They may have offsetting yield advantages but my stock portfolio is heavy in dividend stocks (Income V) … already a rough proxy for high yield corporate bonds.
It’s hard to get excited about US debt with any duration, but if you’re expecting a stock market correction, the short end (and the shorter the better) is a decent place (the only place?) to park funds: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_bill_rates&field_tdr_date_value_month=202404
Pretty sure Bill just posted a couple/few posts ago that that’s his current preference (since he doesn’t explicitly short).
Another consideration is that the fed has been talking up rate cuts (implying moderating inflation) to push the long end lower. This may be another machination – an attempt to buttress real estate.
I’ve been rolling 3-month Treasury bills and have been using the earned interest to buy gold, kind of a GAGFO (good as gold for oil) thing to hedge the purchasing power of the principal. I’d prefer to buy 6-month or 1-year Treasury bills but the interest rates are too much lower for me to accept. Truth be told, I think even the 5.45% on the 3-month bill is too low.