It puzzles a lot of you I know from your emails and your posts on my sites. Frankly, it puzzles me. And I’d say that anyone who says this doesn’t puzzle them has more ego than sense.
The world’s central banks have flooded the global financial markets with cash—and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.
And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.
Does this make any sense?
You can find a potential key to unlocking this puzzle in The Vapors 1980 hit “I’m turning Japanese I really think so.”
Let’s start by trying to understand the logic of the Japanese market at the moment. Read more
Remember a month ago when unexpectedly strong inflation numbers for February raised fears that the People’s Bank of China would start to tighten to fight inflation? Those fears took a substantial bite out of Chinese stocks, calling a halt to the rally that had begun in December.
Well, never mind.
Inflation in China rose at only a 2.1% annual rate in March, well below the 2.5% rate expected by economists surveyed by Bloomberg and even further below the 3.2% annual rate reported for February. Turns out that Lunar New Year holiday spending, which always temporarily raises food costs, was at work again this year. With the passing of February’s holiday period food costs and the inflation rate have dropped back to well below the government’s 3.5% inflation target for 2013.
Food prices climbed just 2.7% in March year over year, a big drop from the 6% rate of food inflation in February.
Producer prices, a measure of how much inflation might be in the pipeline, dropped 1.9% from a year earlier. That was the 13th straight decline in producer prices.
China’s inflation rate rose just 2.6% in 2012, which led the government to lower its target for 2013 to 3.5% from 2012’s 4%
Investors can expect a torrent of economic data from China over the next week. Read more
This morning’s U.S. inflation numbers are good news if you live in the alternative reality called the financial markets. However, if you live in the real world—you know the one where you buy things and have to make income and outgo match each month—the inflation news was remarkably bad.
The headline consumer price index climbed 0.7% in February. That’s the biggest jump in almost four years. It’s also a significant increase from January and December when headline inflation was flat. Economists had expected an increase of 0.5% for the month.
Core inflation, the number the Federal Reserve and financial markets watch, presented a much better picture. The core inflation rate, which excludes volatile food and energy costs, rose just 0.2% in February. That was actually a drop from the 0.3% increase in core inflation in January. The February core inflation number exactly matched expectations among economists surveyed by Briefing.com.
Why the big difference in the headline and core inflation rates? Two guesses—food or energy—and the first guess doesn’t count.
It sure wasn’t the result of soaring food prices. Food prices rose just 0.1% in February.
So it must have been energy, right? Yep, energy prices climbed 5.4% in February (after falling for three consecutive months) on a huge 9.1% increase in gasoline prices.
In financial world all this is reasonably good news. The core inflation measures the Fed watches showed no signs that core inflation might be on the upswing or that inflation expectations might be rising. Nothing in these numbers to suggest that the Federal Reserve, scheduled to meet next week, should consider ending its monthly $85 billion program of quantitative easing early. That’s especially true because the most likely explanation for the increase in gasoline prices—soaring prices for the credits that U.S. refineries buy so they don’t have to blend quite so much corn-based ethanol into their gasoline—can be passed off as a short-term technical problem.
On the other hand, in the real world, these inflation numbers are bad news. Read more
If you need to sell papers, you splash headlines like “Brits to leave European Union over horsemeat in lasagna” across your front page even if they’re total exaggerations.
When Wall Street wants to flog stocks, it runs out stories like “Dow Jones Average hits all time high” even if the story doesn’t mean what Wall Street wants the average investor to think it means.
So, yes, the Dow Jones Industrial Average hit an all time record high price on Monday when it briefly moved above 14,448. The Dow Transportation Average and the Russell 1000 large cap index and the Russell 3000 small cap index have all hit all time peak prices. The Standard & Poor’s 500 stock index is within 1% of its all time high price set in 2007.
I can think of four reasons why the “all-time high price” recorded yesterday doesn’t mean what Wall Street and the headlines say it means. Read more
The Fed looks set to start adding to its balance sheet again: How will the bank ever exit without crashing the bond market?
I think the Federal Reserve is setting up investors for a significant change in policy to be announced after tomorrow’s, Wednesday, December 12, meeting of the Fed’s Open Market Committee.
The new plan would resume the rapid growth of the Fed’s balance sheet and push it to $3 trillion sometime in 2013.
And that just makes the big problem facing the Federal Reserve and the U.S. economy even bigger. After expanding its balance sheet by buying what will soon be an additional $2 trillion in debt to help stave off the worst effects of the global financial crisis and then to support a stumbling U.S. economy, how does the Fed shrink its balance sheet back to something like normal size without crashing the U.S. and global economies?
In other words Wednesday’s Fed meeting has huge implications for bonds, inflation, interest rates and how you structure your portfolio.
The Federal Reserve’s Operation Twist is scheduled to expire in December 2012. That program to swap about $270 billion in short-term Treasuries for longer-term, five- to seven- year debt to lower longer-term interest rates in order to support the recovery of the U.S. housing sector and to stimulate U.S. economic growth is almost certain to end with the year.
But Ben Bernanke and company are also almost certain to replace Operation Twist with a new, more aggressive program of quantitative easing. The Fed is clearly worried that the debate over the fiscal cliff alone or the actual expiration of all of the Bush tax cuts, the Social Security tax reduction, extended unemployment benefits, and the automatic budget cuts imposed by the debt ceiling deal will be enough to slow the U.S. economy and could even send the United States back into recession.
The new program, recent speeches by Federal Reserve governors and basic math argue, will be an out and out plan to buy five- to seven-year Treasuries. That would continue the thrust of Operation Twist but get around a big problem that the Fed now faces. It has become increasingly hard for the Federal Reserve to sell its short-term holdings of Treasuries and to buy medium-term debt to replace them because the Fed has effectively sold most of its short-term holdings. Since September 2011 the Federal Reserve has replaced $667 billion of short-term Treasuries on its balance sheet with medium-term debt. The Fed just doesn’t have much more short-term Treasuries to sell to balance its purchase of medium-term debt.
The new program will require the further expansion of the Federal Reserve’s already massively large balance sheet of $2.85 trillion as of November 21, 2012. That level has been relatively stable since June 2011.
But the new plan would change that. Read more