Economy | - Part 30

A Perfect Storm for Inflation?

It should be pretty interesting to see how everyone reacts if and when sharply higher inflation finally does show up here in the U.S. The economic statistic that, since 2008, has been like the boy who cried wolf will probably have many more doubters than believers right up until the point when it’s too late to do anything about it (that was pretty much the story with the boy and the wolf and, of course, the sheep).

Anyway, they talk about the possibility of a tightening labor market playing a role in higher inflation (a key factor to really get broad-based inflation going) in this clip from CNBC.

That surge in agricultural goods last week took a lot of people by surprise and it’s shown in table form below from a data set that is maintained for the investment website.

Like most commodities, there’s a lot of ground to make up from last year’s drubbing for such products as corn, wheat, and soybeans, but they’re off to a great start this year so far.

It might be a good idea to cut out that extra cup of Joe in the morning as coffee prices just reached a two-year high. Now this is interesting … according to my data, the coffee price surged 77 % in 2010 but then fell 6%, 37%, and 23% in 2011, 2012, and 2013, respectively. Now it’s up 78% so far in 2014.

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The Labor Department reported that nonfarm payrolls rose by 175,000 in February after an upwardly revised gain of 129,000 in January and the jobless rate increased from 6.6 percent to 6.7 percent as more workers entered the labor force but were not able to find jobs.

Including the modest gain of 84,000 in December, recent job creation marked the lowest three-month total since mid-2012 when the unemployment rate was over 8 percent.

The jobless rate rose for the first time since January of last year as the number of unemployed persons rose from 10.24 million to 10.46 million. The labor force increased by 264,000, however, those counted as employed rose by only 42,000 while those currently looking for jobs increased by a much larger 223,000. The labor force participation rates was unchanged at 63.0 percent, not far above the recent multi-decade lows.


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Some highlights from former Federal Reserve Chairman Alan Greenspan’s commentary at The American on why all financial bubbles are not bad and how the world might avoid what increasingly appears to be an inevitable next financial crisis.

Bubbles, the root of the 2008 crisis and earlier ones, for reasons I will discuss later, have become more prevalent. All bubbles deflate, by definition. But most deflate without debilitating economic consequences. On the fateful day of October 19, 1987, for example, the Dow Jones Industrial average plunged 23 percent, the all-time daily record. I defy anyone to find economic disruption in the GDP figures following that date. I believe there was none. Similarly, in the dot-com boom, capital losses, as in 1987, were huge. But the owners of the toxic assets were mainly pension funds, households, and mutual funds; all suffered very large capital losses, but few ever got to the point where they defaulted on debt. And it turns out that the only two times in recent history in which we experienced real contagion in the financial markets were in late 2008, when, as AEI’s Peter Wallison has documented, there was a very destructive subprime mortgage crisis, the toxic assets of which, of course, were highly leveraged. And in 1929 we experienced a leveraged broker loan crisis. The result was contagious defaults.

The question before policymakers is how to avoid such breakdowns in the future. As far as I can see, the only way to address such issues is to recognize that euphoria-driven bubbles are an inherent consequence of human nature over which we have little or no control. Successful financial policy, in my experience, ironically spawns the emergence of bubbles. There was never anything resembling financial euphoria, or the bubbles it creates, in the old Soviet Union, nor is there in today’s North Korea. At the Federal Reserve during my tenure, we often joked that our greatest fear was that policy might be too successful. Achieving an underlying stable rate of growth and low inflation appears to have been a necessary and sufficient condition for the emergence of a bubble. We would conclude with mock seriousness that optimum monetary policy for bubble prevention was to create destabilizing inflation.

Can bubbles be prevented from rising once markets are in the grip of euphoria? At the Fed, we tried to defuse the nascent dot-com bubble of 1994. We failed…

He goes on at some length, but, I lost interest after the mid-1990s bubble-fighter reference.

The message appears to be: “It wasn’t my fault, we were too successful at the Fed, you can’t control animal spirits, and we’ll always have bubbles”.

Rubin to QE3: “Me No Likey”

There’s a lot not to like about former Clinton Treasury Secretary and former Citigroup CEO Robert Rubin since, along with former Federal Reserve Chairman Alan Greenspan, these two probably did more than any other two people on the planet to create the mess that we find ourselves in today.

However, there is some small redemption for Rubin given the views he expressed on the Fed’s latest round of money printing last Friday in his address to a forum on monetary policy at the University of Chicago Booth School of Business as detailed in this WSJ story.

“The real issue is, what were the risks and rewards of QE3? There’s a widely held view that the benefits of QE3 have been relatively limited,” Mr. Rubin told an audience that included several Fed officials. At the same time, “these vast flows of capital have gone up the risk curve and created what may well have been excesses, that now as we know are tending to unravel — and that has a destabilizing effect.”

Mr. Rubin also said he is not as confident as top Fed officials who say they can absorb the high level of reserves in the banking system when the time comes to tighten monetary policy by simply raising the rate the central bank pays for holding excess reserves.

“I don’t think there are any magic wands,” Mr. Rubin said.

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy and a WSJ contributor, then asked Mr. Rubin what the Fed should do about monetary policy at the current juncture.

Mr. Rubin’s answer elicited laughter from the room of Wall Street and hedge fund economists: “I think I would do what the Fed seems to be doing, but I don’t know what the Fed is doing. I hope they know what they’re doing.”

A much better response to Mr. Wessel – and an answer that I probably won’t ever forget – came from GMO’s Jeremy Grantham who, when asked a similar question some time ago quipped, “Well, I wouldn’t start from here.”

ISM Manufacturing Index Rebounds

The Institute for Supply Management reported that U.S. manufacturing activity expanded at a faster pace last month as their widely followed index rose from 51.3 in January to 53.2 in February, a reading that would likely have been higher if not for the bad winter weather.

Recall that readings above and below 50 indicate expansion and contraction, respectively. As such, this marked the ninth straight month of expansion in the manufacturing sector following a brief lull last spring.

The new orders index, a key leading indicator for the industry, rose from 51.2 to 54.5 while weather hampered production, this sub-index dropping from 54.8 to 48.2.

Inventories and backlog orders moved from contraction to expansion, these indexes rising from 44.0 to 52.5 and 48.0 to 52.0, respectively, while employment was steady at 52.3. There remains little inflation pressure as prices paid fell from 60.5 to 60.0.

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