Notes From Underground: The Dog Days of Summer

The doldrums of August are upon us … though not really. There is the ongoing debate about inflation prompting the FEDERAL RESERVE to accelerate the pace of its asset purchase tapering — when it begins — while it is the elevated levels of minority unemployment that will likely force the FED to maintain its lower-for-longer policy.

The chatter remains about REAL INFLATION being above the FED‘s 2% mandate, a self-imposed threshold, while JANET YELLEN/JEROME POWELL discuss REAL UNEMPLOYMENT being above its mandate of maximum full employment. The central bank has promoted both mandates at times so it is difficult to deem what is REAL. It is of great interest that in the last few days KNOWN FED DOVES have taken a decidedly more “hawkish” posture. Atlanta Fed President Rafael Bostic, St. Louis Fed President James Bullard, and in Thursday’s Financial Times, San Francisco Fed President Mary Daly all raised the issue of reducing stimulus as soon as this year.

“I remain very optimistic and positive about the autumn and ongoing improvements in the key variables we care about,” Daly said in the interview. “That for me means it’s appropriate to start discussing dialing back the level of accommodation that we’re giving the economy on a regular basis, and the starting point for that is of course asset purchases.”

Daly, along with President Neel Kashkari, has been the most dovish of the regional presidents so this about face has me suspect some type of Powell policy piece at the upcoming conclave in Jackson Hole. This is something to watch because of the sudden change. My problem with the “hawkishness” from Bostic, Barkin, Waller and Daly in the past week is that they all had a vote at the July FOMC meeting yet not one voted NO to the dovish forward guidance offered up by Chair Powell. NOT ONE NO VOTE.

The recent data releases have not surprised the market as all have come in around expectations. If the FED is going to be announcing a move to CUT ASSET PURCHASES the DOLLAR OUGHT TO RALLY, PRECIOUS METALS SOFTEN, THE YIELD CURVE FLATTEN (5/30) and even EQUITIES CORRECT. CNBC’s Rick Santelli graded Thursday’s 30-year Treasury bond auction a D+ by Rick Santelli (I disagreed), but following the sale, the bonds rallied as the 5/30 had a slight flattening bias late into the day. There is much to be alert to during the DOG DAYS OF SUMMER and be very flexible as lower volumes can be a blessing or a curse. Be patient and wait for your levels to provide the best risk/reward opportunities.

***I’ve included a link for the latest podcast from the Financial Repression Authority. There’s been some early criticism from listeners is that is too pedantic/wonky as we dig deep into the theoretical basis of our analysis. Quality discourse relies on intellectual integrity, so the citing of sources is not meant to impress but to lead listeners to research investable themes for profit. Even the FED relies on the support of academic theory to justify its policies (Bernanke noted the work of Michael Woodford for the basis of his dependence on FORWARD GUIDANCE.)

Click here to listen to the podcast.

Part of the dovishness of the current FED regime is based on the concept of flexible adjusted inflation targets, which allows the central bank to run inflation above 2% to balance out all the years of sub-2% inflation. This concept is drawn from the work of Ken Rogoff, 2ho wrote more than 10 years ago that a few years of 4%/6% inflation would act to relieve an overhang of debt stress following a financial crisis.

Rogoff reiterated this view in a Financial Times op-ed three weeks ago titled, “Don’t Panic: A Little Inflation Is No Bad Thing.” Rogoff is trying convince us that it is better to endure a little higher inflation because it reflects a stronger economy. “Would we feel better if the economy were much weaker and inflation were lower?”

The piece contained this rationale for policymakers from one of economics leading academics. He wrote: “In 2008, as the financial crisis unfolded, I argued emphatically that central banks should relax their 2 per cent inflation targets and aim temporarily  for 4 to 6 percent inflation for a few years. Had they moved quickly and adopted effective negative interest rate policies, I believe that would have been possible. Higher inflation for a few years would have helped stimulate demand and taken the edge off many unsustainable debt burdens.”

This is the intellectual cover the FED can rely on to sustain higher inflation in an effort to achieve real low unemployment. For the record, Rogoff is also a member of the G-30.  Enjoy the podcast.

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7 Responses to “Notes From Underground: The Dog Days of Summer”

  1. Kevin Cousins Says:

    Hi Yra “a little inflation” reminds me of the classic quotes from “Lords of Finance” (to my mind the best monetary policy primer there is). The full quote is a bit long but it’s worth it:

    Rudolf von Havenstein, President of the Reichsbank

    “Von Havenstein found himself in the classic dilemma of the dutiful civil servant. He was now working for a government for which he had little liking, one that was pursuing a social agenda he did not believe in and thought Germany could ill afford…Nevertheless, despite these fundamental disagreements, Von Havenstein acceded to the government’s requests and allowed the Reichsbank to print money to finance the budget gap.

    Why did Von Havenstein submit without any apparent effort to resist?

    Von Havenstein faced a very real dilemma. We’re he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germany’s current fragile state might precipitate a real political convulsion.

    As the prominent Hamburg banker Max Warburg, a member of the Reichsbank’s board of directors, put it, the dilemma was “whether one wished to stop the inflation and trigger the revolution” or continue to print money.

    Contrary to popular myth, Von Havenstein was perfectly aware that printing money to finance the deficit would bring on inflation. But he hoped it would be modest…

    It was a total miscalculation. Von Havenstein failed to recognise that experimenting with the currency was like walking a knife edge. A moderate degree of inflation does not remain moderate for long. At some point the public loses confidence in the authority’s power to maintain the value of money, and deserts the currency in panic.”

    While the market is confident a modern Central Bank could never make the glaring policy errors of the Reichsbank, BoE and Fed in the 1920’s and 1930’s, Lords of Finance shows this to be a fallacy. Very knowledgeable and experienced policymakers choose what they believed to be the best action at the time, the alternatives were considered way worse.

    Our modern CB’s will face similar choices, do they stamp on inflation at the cost of their employment, social justice/distribution and now environmental objectives, or do they let it run a bit? We know what the answer is, and Lords of Finance shows us the historical precedent…

    • Yra Says:

      Kevin—thanks for the post.Also not to be minimized was the overhang of the stifling reparations propmpted by French desires to exact revenge on the Germans for 1871 Franco/Prussian war which the French suffered such great humiliation.This is now as we remember 50 years ago the end of Bretton Woods–8/15/71 by Nixon—-Bretton Woods was put in place to insure against another debacle as was set in motion with the Treaty of Paris and all its disasterous pratfalls culminating in German debauchment and ultimately the continuation of hostilities in 1939–but the Bundesbank bears a great deal of responsibility –still haunts the German financial system–always will be a problem for the EU —for proof see the recent musings from Herr Weidmann

  2. Yra Says:

    apologies to my readers—the link to the podcast was inadvertently the link to the FT column with Mary Daly—will be corrected now

  3. Watt Tyler Says:

    In the past machines have NOT had the ability to listen, feel, see and react using a complex behavior model. This is NOT AI but it is M/L and I think “this time is REALLY different.”

    Normally a pandemic ( fiscal or biological) has an effect on Labor. If biological then it FAVORS labor ( black death , shepherds…) but this time it might not. Why employ someone when the factory of TODAY is a micro factory ( Arrival in UK), produces just in time product that requires almost NO manual upkeep ( goodbye mechanics) and a much smaller labor force comprised of programmers and robotics specialists. Apply same across all industries.

    I suppose my question is “are you looking at the inflation of yesterday or the inflation of tomorrow.” If there is a difference, and I think there is, then historical references might not be helpful here as society is changing too quickly.

    • Yra Says:

      Watt—I don’t believe inflation has always been a wage enhanced issue otherwise we would not have had the immiseration of the masses that was the propellent behind Marx and his efforts to seek ways to alleviate the misery he claimed the capitalists caused as they squeezed wages for ever higher profits—so I don’t know what the inflation of yesterday entails–monopoly profits squeeze everyone but the oligarchy

      • Watt Tyler Says:

        Hmm, seems that the part about micro factories (Arrival in the UK) got caught up in the noise. If this approach is the future of ALL manufacture, and I believe it is, then the labor portion of your argument won’t have the same leverage as yesteryear. Cv19 has shown us that they will give up benefits to take on a more flexible work environment. So might give up 10 at current employer to work on a maker project which could turn into a new revenue stream that exceeded their original job. Basically a weakening of monopolies across the board.

  4. Arthur Says:

    A perspective on inflation

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