Category: Economy

The CPI numbers have crossed the magic 2% number that the Federal Reserve aims for.

The Federal Reserve claims they try to target the PCE which has not yet crossed the 2% threshold.

In reality, they watch all of these numbers carefully. The Federal Reserve wont start to get concerned about inflation until the CPI crosses the 3% or maybe even 4% threshold.

Why 2%
No one challenges the FOMC members about why they target 2%. At their website, they make the claim that 2% promotes economic growth. They offer no evidence of this.
The origin of this crackpot idea comes from Milton Friedman. Friedman was heavily influenced by Irving Fisher. Fisher is famous for going broke in the 1929 crash and a few days before the panic stated that stock prices had “reached what looks like a permanently high plateau.”
In ‘Capitalism and Freedom’, Friedman states the following:

My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, I would define the stock of money as including currency outside commercial banks plus all deposits of commercial banks. I would specify that the Reserve System shall see to it that the total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X percent, where X is some number between 3 and 5. The precise definition of money adopted, or the precise rate of growth chosen, makes far less difference than the definite choice of a particular definition and a particular rate of growth.

Later in life he altered his view and favored 2% instead of his 3-5%. The last sentence in the quote above is so absurd its hard to believe anyone would write down such a thing. Words must be defined. Friedman did an intellectual punt. The Friedmanites never did zero in on one definition of the money supply figure.
In ‘The Mystery of Banking’, Rothbard answers the question: what should the supply of money be?

What should the supply of money be? What is the “optimal” supply of money? Should M increase, decrease, or remain constant, and why?
This may strike you as a curious question, even though economists discuss it all the time. After all, economists would never ask the question: What should the supply of biscuits, or shoes, or titanium, be? On the free market, businessmen invest in and produce supplies in whatever ways they can best satisfy the demands of the consumers. All products and resources are scarce, and no outsider, including economists, can know a priori what products should be worked on by the scarce labor, savings, and energy in society. All this is best left to the profit-and-loss motive of earning money and avoiding losses in the service of consumers. So if economists are willing to leave the “problem” of the “optimal supply of shoes” to the free market, why not do the same for the optimal supply of money?
In a sense, this might answer the question and dispose of the entire argument. But it is true that money is different. For while money, as we have seen, was an indispensable discovery of civilization, it does not in the least follow that the more money the better.
Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better.
But money is uniquely different. For money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another. Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.
…But isn’t it necessary, one might ask, to make sure that more money is supplied in order to “keep up” with population growth? Bluntly, the answer is No. There is no need to provide every citizen with some per capita quota of money, at birth or at any other time. If M remains the same, and population increases, then presumably this would increase the demand for cash balances, and the increased D would…simply lead to a new equilibrium of lower prices, where the existing M could satisfy the increased demand because real cash balances would be higher. Falling prices would respond to increased demand and thereby keep the monetary functions of the cash balance exchange at its optimum. There is no need for government to intervene in money and prices because of changing population or for any other reason. The “problem” of the proper supply of money is not a problem at all.

Everything looks rosy on the job market front.

The fed supplied repo to market has now surpassed the Y2k scare and the 08 crisis.

Repo operations were always part of the fed operation up until the 08 crisis.

Vox was a big champion of California’s Assembly Bill 5. California’s new freelance worker “protections” aren’t doing much to help gig workers who contracted with Vox though. But the people at Vox are not very bright. So now we have this meme to point out their stupidity:

Instead of having the freedom to work on their own time, they got laid off. Laura Wagner is a senior staff writer and journalist. In other words, she is not very bright. So a freelance worker calls her out.

Will Laura Wagner change her philosophy after being confronted with reality? No. Statism is a religion.
Uber and Lyft drivers get to make their own work hours. Some use it as supplemental income. They log in and drive during peak hours. This helps people with low paying jobs have extra income and increases the supply of drivers during critical times so people can get from point A to point B cheaply.
Most people, especially journalist, can not follow long chains of economic reasoning. My only problem with these people is that they think they can use coercion, via governments, to implement their philosophies.

The NY open market trading desk is about to flood the repo market.

This is about a quarter of a trillion dollars between now and the end of the year. The fed appears to be taking very serious the warnings about a repo-apocalypse 2.0 that experts have been warning about.

About 18 months ago there were hundreds of articles about the “horrible” housing numbers and this was proof a recession was imminent. I wrote a post about it: “Bears Grasping and Faulty Analysis”.
One of us was dead wrong. As these same numbers are now approaching a decade high, these people are no where to be found.

Two months ago, the bears were talking about the dislocation in the repo market. They latched onto this as proof a stock market crash was going to happen this fall. I posted about it here. My conclusion was the following:

This seems to be a temporary dislocation in the overnight interbank lending market and not a sign of stress.

My point is that there is a lot of noise and hysteria. I suspect a lot of these people do not have skin in the game. After all, if you were a bear for the past decade you would have been flat broke ten times over. The perma-bears have learned it is more profitable to start a subscription website and tell people what they want to hear.

The US economy is still strong and the bull market is intact. I have been pounding on the table about this for years. However, one day it will end. It is important to look at where the excesses are forming. When the credit cycle begins to end, we will see stresses forming in these areas first. Consider the 2008 bust. The housing market peaked in 2006. Signs of stress developed in early 2008. Watching the housing market during that time period was key.
Now one area we should be watching is the leveraged loan market. Over the past few years, there has been a significant rise in leveraged lending to corporates. This is primarily due to the federal reserve lowering interest rates. In this long period of low interest rates, banks are generating fees by financing leveraged corporate loans. They are packaged into CLOs (collateralized loan obligations) and sold off to generate more fees. The quality of these loans has been deteriorating over the past few years as the demand keeps rising for them.

One source of demand has been coming from pension funds. This prolonged period of low interest rates are causing pension funds to get involved in complex and leveraged synthetic financial instruments such as CLOs. The problem with these derivatives is that no one knows what is in them expect for a few geeky financial engineers. They use complex formulas that have no basis in reality to package them in an attempt to mitigate risk. The 2008 derivative blow up should have made them rethink their models.

In the meantime, as long as credit and money growth continues to grow we will have an environment bullish for US stocks. Since 2009 corporations have borrowed money dirt cheap to buy their own stocks. I do not see this ending in the near future.

Raoul Pal is always on recession watch. He has an interesting video below. He claims the US is in recession.

The Federal Reserve manipulates money and credit. They create the boom and bust cycle. Therefore, at some point, a recession will come. There is no wisdom in making such a statement. The question is always when.
I agree with  Raoul Pal on many things.
First, we are living through tech bubble 2.0. The Silicon Valley madness is very real. Companies go public with no intention of ever making a profit. The public gobbles up these shares. There are tales about the South Sea Bubble. One story about the South Sea Bubble always made me laugh. Apparently, an adventurer started a company entitled, “A company for carrying on an undertaking of great advantage, but nobody to know what is.” He opened an office in Cornhill, London the next day and sold a 1000 shares. That night he took off on his adventure and was never heard from again. When investors bid up a stock that states it has no intention of ever making a profit, I wonder about the sanity of some people.
Second agreement is about debt markets in general. Corporate and government debt is going to blow sky high one day. He begins his discussion about corporate debt at 39:25. When junk bonds approach 0% you know you are living through madness. Some companies have way to much debt.
However, there is no reason why this can not continue for many more years. The yield curve is back in positive territory. Credit and money supply growth is robust. Earnings growth is still positive. We have not even entered an “earning recession” like that of 2015 and 2016. I do not believe a US recession will start this year. I think US stock markets are going higher. One of us is dead wrong.

The fed is back to expanding its balance sheet after just 18 months of contracting it. The fed returning its balance sheet to pre-2008 was always a lie. I do not think the balance sheet will EVER go back to pre-crisis levels.
It increased the overnight REPO liquidity available from $75 billion to $120 billion and term REPO provision from $35 billion to $45 billion.

The monetary base, which is the sum of currency plus deposits held by depository institutions at Federal Reserve Banks, continues to contract. Given that excesses reserves keep leaking into the system this is expected.

M2 has been increasing more than usual for this time of year.
The level of growth in 13 week M2 NSA for week 28 was so rare, I decided to go back a few years to see how many times it occurred. Since 1997 it has only occurred once in 2011. It topped out at 16% growth in 2011. This marked the bottom of the US economy post the 2008-2009 recession.

Above all, the fed will remain accommodating.
Watching the FOMC members speak and their actions suggest they are going to just react to events. There is nothing new to this point but they have created so many new tools, I doubt they are keeping track of all of them. It reminds me of the spinning plate man. One day in the future, they will begin to topple. That day is just not here yet.