Wednesday, January 26, 2011
Portfolio manager, Bill Gross manages more bonds than anyone in the world. Pimco's founder talks to Barron's Michael Santoli on the improving economic outlook for 2011. Problems loom with declining dollar, government debt and high unemployment:
Meanwhile, the Reserve bank of India has raised its benchmark rates, yet prices may be outpacing the increases in rates. Dow Jones Newswires' Mark Cranfield reports:
Tuesday, June 01, 2010
Thursday, January 07, 2010
Yet like all great schemes it has its limits. "But now the world is losing faith, as well it might. It's not that the dollar is overvalued—economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors." Ouch! Take away my membership in the American Economics Association before you compare me to Rick Wagnoner!
Saturday, February 14, 2009
Note Keynes was an inflationist only in the starkly deflationary post-World War I Britain which returned to the Gold Standard at the pre-war parity. This policy forced Britain into a difficult deflation of prices and a real economic adjustment of heart wrenching dimensions. The alternative was to have Britain devalue the pound, undermine London's position as the world's capital market, and effectively default on its war debt (i.e., "Here we will pay you back the war debt, but with pounds that buy less in gold.") Britain chose economic and human disaster over financial disaster, although the choice was less obvious than my words suggest.
Why is inflation bad? It creates arbitrary redistributions of wealth and it distorts incentives. The lesson our current financial custodians fail to understand is that over expansions of credit sometimes result in the inflation of asset prices rather than the inflation of commodity prices: it inflates the prices of stocks rather than flows. But that also is unfair. They may perceive that positive conclusion. What they may fail to understand is its normative implication that asset price inflation is bad: that it too creates arbitrary redistributions of wealth and distorts incentives. Anyone who doubts that should look to the asset price bubbles of the late 1980s (house prices in New England and California); the dot com bubble of 1995-2000; and the housing bubble of 2004-6. Each created arbitrary redistributions of wealth. Each distorted incentives and created a misallocation of resources. Misallocations of resources can not be undone without pain.
In 2002 through 2004, Alan Greenspan worried about deflation: Commodity prices might fall! As the comedian in the Catskills might say, "We should have been so lucky already!"
Corrections made 1/31/2011
Sunday, December 07, 2008
What do you think of his recommendation that central banks rather than targeting a positive inflation rate, should target the price level (i.e., zero inflation)?
Wednesday, November 26, 2008
Martin Wolf in the Financial Times tells us, "Why fairly valued stock markets are an opportunity." With the above graph, he looks at the long run fluctuations in Tobin's Q and cyclically adjusted P/E ratios. He gets the former from Andrew Smithers. The latter comes from Robert Shiller.
To my eye, it appears that long run market trends are associated with inflation regime shifts: the World War I inflation, the resumption of the gold standard, Bretton Woods, the Great Inflation of the 1970s beginning in the mid 1960s, the Vocker retrenchment, and the Greenspan punchbowl (i.e., "We do not prick bubbles and we live in fear of the demon deflation." The traditional role of the Fed was to take away the punchbowl just when the party got interesting.)
The valuations in the 1940s and 1950s may be understated, particularly for Tobin's Q. The government accelerated the recognition of much capital investment as part of the war effort in World War II. some economists believe this led to an underestimation of the capital stock and perhaps also an understatement of reported earnings and equity.
How sanguine should we be? Wolf concludes, "investors with long time horizons (the relatively young, or institutions) are, for the first time in almost two decades, confronting attractive, although not sensationally attractive, market valuations. ... nevertheless, formidable pressures for further falls in valuations, as leveraged players continue to be forced to offload assets at bargain prices."
Wednesday, September 17, 2008
Saturday, August 23, 2008
Henrique Meirelles is the head of the Banco Central do Brasil and he understands his job description.
Antonio Regalado and Joanna Slater relate in today's Wall Street Journal, "During one of Brazil's many past bouts of high inflation, Henrique Meirelles recalls, he and his maid had a deal. On payday, she didn't have to work. That way, she could rush to the store and spend her entire month's salary before it became worthless.
"Mr. Meirelles is now head of Brazil's central bank, and the country's inflationary past is a big reason why he now ranks as one of the world's toughest inflation fighters. Even as the global economy slows, the Banco Central do Brasil has acted more aggressively than many of the world's central banks against inflation, raising short-term interest rates to 13%. The bank is expected to raise rates again in September."
The whole article is quite interesting. My favorite quote comes when Senhor Meirelles explains there is little "room for leniency. When there is disequilibrium between supply and demand, he says, it will be corrected in one of two ways: higher prices or higher rates.
"'The big advantage of using the interest rate is that you have someone in the driver's seat. When inflation is taking care of it,' he says, 'no one is driving.'"
A global approach is needed to beat inflation
By Adam Posen and Arvind Subramanian
The Financial Times: August 21 2008
The world’s top central bankers meeting in Jackson Hole this weekend should do more than bemoan their respective financial risks. They should hammer out a joint approach to reducing global inflation, centred on a common public commitment to tighter monetary policies. Moreover, with the European Central Bank and a few emerging market central banks (such as those of Brazil and India) having taken the lead, the spotlight should be on the US Federal Reserve and People’s Bank of China. They must participate in this effort, rather than try to free-ride – which would only delay and increase the cost of their own inevitable tightening.The view of many central bankers is that there are few if any gains from monetary policy co-ordination. This view profoundly misreads the present situation.
Thursday, August 14, 2008
Wednesday, July 16, 2008
"So it is not surprising that inflation is rising everywhere. What does appear puzzling is that, at 4%, euro-area inflation is at about the same level as that in the U.S. and has actually risen by a greater amount over the past year. That's despite a significant appreciation of the euro against the dollar during the same period."
Thursday, July 10, 2008
"The leading commodity indexes have risen between 45 and 55 percent in the past 12 months.
"Commodities are raw materials -- such as oil, aluminum, wheat and lumber -- that make up everything consumers buy."
According to Ken Vandruff in the Wichita Business Journal, "Airxcel manufactures air conditioning and heating equipment for recreational vehicles, schools and the telecommunications industry." To produce RV air conditioners, as does Wichita's Airxcel, you need to buy aluminum, steel, and other raw materials. Aluminum prices are up 18% over a year ago. Dan Voorhis quotes "Gary O'Neal, division manager for Central Plains Steel in Wichita," to the effect that hot rolled steel is up 80%.
I am quoted as placing the blame on the worldwide inflation set off by the over expansion of dollar denominated credit. What the ten wisemen at the Fed seem to have forgotten in their haste to deal with the credit crunch is that a general inflation first shows up in commodity prices. Moreover in the three rounds of accelerating inflation Americans suffered through during the Great Inflation of the 1970s, food price inflation was a leading indicator of general inflation. Our own regional Federal Reserve Bank of Kansas City president, Thomas M. Hoenig, has frequently been an inflation hawk, but he rotated off voting membership on the Federal Open Market Committee in January.
-Malcolm C. Harris, Sr., Professor of Finance, Friends University
Monday, July 07, 2008
Read her article here.
Friday, July 04, 2008
Robert Mugabe has long been an embarrassment to Africa. He has built a totalitarian regime on the crudest thuggery. Now he is committing economic crimes against humanity. Zimbabwe's hyperinflation is, to the extent it is measurable, running at a million percent, according to David Gaffin on Marketbeat. The picture on the right shows how many bank notes are needed to buy one bottle of beer. But that was a few days ago, prices change minute to minute.
Supplying paper to print the currency has been a lucrative business for a Bavarian company, Giesecke & Devrient. The Wall Street Journal describes it as "a secretive, family-owned Bavarian company that once made its money churning out worthless cash for the doomed Weimar Republic in the 1920s." Giesecke & Devrient "has been airlifting tons of blank notes to the Zimbabwean capital Harare. The company, which has been doing business with the African nation since before Mr. Mugabe took power in 1980, is one of the few sources in the world for the specialized paper that is so important in an age when computers and laser printers have made forgery easy."
What is Zimbabwe's fiscal policy? It is the same as its monetary policy: have paper will print! However that may end. Under pressure from the German government, Giesecke & Devrienthas stopped supplying Mugabe. Will the Chinese now supply his printing presses?
Wednesday, June 11, 2008
The chairman of the Federal Reserve has finally noticed that the dollar is making Latin American currencies look strong. His speech to the International Monetary Conference, in Barcelona, Spain was widely interpreted as “jawboneing” the dollar up. What is really needed is shock treatment: a large and unexpected hike in the federal funds rate. Bernanke’s attempt to fight the recession and the credit crunch by flooding the world with liquidity is instead drowning the economy in a flood of inflation and sinking the financial institutions he hoped to save.
What caused the Fed’s Chairman to finally notice the dollar?
Firstly, inflationary expectations are red hot. The market for indexed treasury bonds indicates investors are expecting inflation of 3.4 percent over the next ten years. That is based on data from the Cleveland Fed. Investors are voting with their dollars that the Fed is way off its 1-2 percent inflation target. Households are telling pollsters a similar story. Last month, when the University of Michigan asked consumers what they expected inflation to be over the next twelve months, they answered 5.8 percent. That is the highest reading in twenty-six years. What they told the Conference Board was an even scarier 7.7 percent (a record high survey result.) Lynn Franco, Director of its Consumer Research Center said "Consumers' inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead." The last time households were this pessimistic about prices, they were the walking wounded still skeptical about Paul Volcker’s epic war against inflation.
Secondly, import inflation is sucking purchasing power out of the economy so fast that it is aborting any potential recovery. Import prices rose 17% over the last year. America imports $2 trillion worth of goods and services. Do the math: that is a loss of purchasing power of about $340 billion. That is more than twice the size of the fiscal stimulus package.
Thirdly, inflation on domestically supplied goods is taking away another $200 plus billion of purchasing power. As inflation gets more and more entrenched, the economy will become progressively more immune to fiscal and monetary stimulus.
Fourthly, the monetary mavens at the Fed have started to realize their big mistake. By focusing on the so-called “core inflation rate,” they took their collective eye off the ball. The Fed has targeted “core inflation” at the expense of “headline inflation.” What the Fed calls “headline inflation” measures the rise in the prices of what we actually buy. Little wonder that makes the headlines. We measure “core inflation” by pretending we do not eat, do not feed the kids, do not heat and cool the house and do not drive the car: we subtract food and energy prices from the price index. The theory is that “If core inflation is OK, we are OK.” The Fed thinks we are OK. A trip to the supermarket would have cured that delusion. While oil prices have had the lion’s share of the headlines, food price inflation has really hit American households hard. It is those trips to the supermarket that have the American consumer hopping mad. Food prices are rising at two and a half times the “core inflation” rate. Consumer inflationary expectations are tracking food price inflation much more than they did in the past. Worse, given the rapid rise in inflationary expectations, this is going to start bleeding into wages and the prices of other goods and services. If you look carefully at the Great Inflation of the 1970s, that nightmare we all want to avoid reliving, food prices consistently led both “headline inflation” and “core inflation.”
Lessons of the 1970s
A sober economic historian would judge the years 1973 to 1982 as the worst decade in the last sixty years. The misery got started when another Fed Chairman, Arthur Burns, pumped up the supply of money and credit to achieve domestic objectives (reelecting the president.) The money supply grew 13.4% and liquidity assets in double digits in 1971. With the dollar as world’s reserve currency, exported his inflation to the rest of the world. The main economies started expanding in unison setting off a global commodity price boom. Oil prices, then as now, only took off after the bandwagon already had a powerful momentum going. In short order, the dollar was devalued and the international monetary system thrown into chaos. New York started losing ground as the world’s financial center to London and others. The economy went into a severe recession as inflation sucked purchasing power out of it and inflation disrupted economic decision-making. After a decade of accelerating inflation and three recessions, economic sanity was restored with much pain and suffering. Vast amounts of wealth were redistributed and unemployment averaged seven percent.
I am experiencing a terrible feeling of déjà vu. In the U.S., an overexpansion of credit caused a house price bubble, particularly for high-end houses. This was fed by and help to feed the creation of ever more complex financial instruments whose connection to the underlying fundamentals was evermore distant. As with all speculative excesses, this one too had to come to an end. As these distortions started to correct themselves, the housing market turned down. The esoteric instruments born in the boom had been sold globally. Investors around the world started to realize that they had bought a pig in a poke and the pig was now starting to stink. The resulting stampede to sell these securities led to a credit crunch. The Bernanke Fed’s initial attempt to deal with the crisis was to flood the world with liquidity and slashing the federal funds rate. The result was uncomfortably like being in a house where someone in the living room is cold. This thin-blooded soul jacks up the thermostat so that everyone else is sweating. A wiser solution would have been to put on a sweater or get a space heater.
Monday, June 02, 2008
Inflationary expectations are growing. That comes across loud and clear from a number of surveys:
When the Conference Board surveyed households in May they found they expected an inflation rate of 7.7 percent for the year ahead (a record high survey result.) Lynn Franco, Director of its Consumer Research Center said "Consumers' inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead."
The University of Michigan reports that households expect inflation over the next five years to be near 3.4 percent, its highest reading since 1995.
The professional forecasters surveyed by the Federal Reserve Bank of Philadelphia (the old NBER/ASA survey) projects inflation over the next five quarters at 2.5 percent.
Another gauge is the difference between regular treasury bond yields and those on Treasury Inflation-Protected Securities (TIPS.) Currently the spread is 2.45 percent which would appear to indicate that investors expect a 2.45 percent inflation rate over the next ten years. But that may understate investors' true expectations. The Federal Reserve Bank of Cleveland adjusts the raw spreads for liquidity premia. Charles T. Carstrom and Timothy S. Fuerst explain how that is done in a briefing. With this adjustment the implied expected inflation rate is 3.32 percent.
Saturday, May 31, 2008
Historically investors have had to protect themselves against rising inflation by demanding higher yields. There is a nasty lesson every bond market neophyte learns quickly and painfully: higher yields mean lower prices. In the 1970s, bonds were called "Certificates of Confiscation," because their losses were so great. The bonds' principal kept losing value in real terms as inflation eroded their purchasing power. Then prices fell each time inflation accelerated. Investors marked them down to keep yields up with inflation.