This past week Janet Yellen had a few things to say about inflation during her Congressional testimony. Echoed were concerns about the ‘I’ word here in London. First, onto Janet on the subject of tightening:
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”
Sound familiar? This is the same sort of language that we’ve been hearing since the inflationary 70’s and 80’s during the Volker era.
Not that it’s wrong, but it borders on out-of-date Economics. Here’s why:
We’re in a new world, Janet. You were educated during the 70’s-80’s when the western economies were being crippled by inflation.
But today, it ain’t so.
DEFLATION
The greatest threat to the Western Economies today is not inflation; it is DEFLATION. Why?
China and other cheap economies pay their workers dirt wages, or bare subsistence. They import our jobs, and they export a lower standard of living through wage deflation.
The western economies, such as Britain, can solve this problem temporarily by importing cheap labour from Eastern Europe. True, in the short term output will increase, but the trade off is that there are and will be UNFUNDABLE demands on the NHS, the school system, and infrastructure. These demands will only increase as time goes on, and they will increase the UK national debt of £1.5tril.
Meanwhile, the native UK kids are being priced out of the market, leading to them signing on, and increasing the cost to the welfare state. Brilliant.
UK INFLATION
This past week saw THE UK CPI increase from 1.6% to 1.8%. Most of the increase was due to the price of oil, which can fall just as rapidly as it can rise. But the alarmists were clamouring that this level is dangerously close to the BoE’s inflation target of 2%.
Again, this is 70’s-80’s thinking which does not recognise that we are basically in an era of deflation.
I say, let’s move the target to 2.5%.
Permit me to quote a stat from my column last week. This stat covers the BoE minutes:
“But more significantly, the Bank revised its equilibrium jobless rate from 5.0 to 4.5, meaning that there is more potential expansion in the labour market than previously thought. Another sign of low inflation.” [Read: deflation]
They say that Army generals always fight the last war. The same theory now applies to our senior economists.
Janet, wake up. Your 70’s-80’s schooling no longer applies. We’re in a new era, the era of deflation.
SOLUTION FOR THE US and UK
Tie the central bank rate to the index of leading indicators. If the index increases by 0.2%, then increase the Fed rate by 0.25%. Eliminate the guess work, remove Janet and her colleagues from the decision making process, and then cut their salaries in half.
And provide a similar solution for the UK.
UK BUSINESS RATES TO INCREASE
Needless to say, this is a bad idea, but because we need to move on, I’ll prepare a detailed analysis for next week’s column. Stay tuned.
GOLDMANS AT TRUMP
"I know the guys at Goldman Sachs. They have total, total control over (Ted Cruz). Just like they have total control over Hillary Clinton," DT said during the primaries.
So who has he appointed to his cabinet? The following Goldmans alumni and an associate:
Gary Cohn, Head of Council of Economic Advisors
Steve Bannon, White House Chief Strategist
Steven Mnuchin, Secretary of the Treasury
Jay Clayton, a lawyer who represented GS, now heads the Securities and Exchange Commission
And let’s remind ourselves that Goldmans were largely responsible for putting the financial markets into the crisis of 2008. Again, pardon me for quoting from my column of last week:
‘CDO’s, [Collateralised Debt Obligations] by the way, were unregulated due to intense lobbying by the financial services industry, spearheaded by Hank Paulson of Goldman Sachs. Paulson also spearheaded an increase in leverage to finance these products. (Leverage is the amount that a bank can borrow based on capital reserves in order to finance dealings.) Industry wide, leverage rose from single digits upwards to 30 to 1. (The ‘1’ being the amount of capital on reserve.)’
Hmmm...
Meanwhile, the SPX, has, with all the typical bull market disregard for risk, pushed through 2300 to appx 2350. When will this lift off run out of gas? Who knows, but when it does, look for support at 2200.
For the time being, you may wish to buy the VIX @ 11% in anticipation of a SPX sell-off, but I wouldn't. This is because the VIX can languish for months at this level. The problem is that when the SPX breaks, it will come fast and furious, with no time to get in. My best advice is to look for SPX bear market indicators, such as a spike in crude or the CRB index. Then get in.
Regards, LJ
No comments:
Post a Comment