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Thursday, September 19, 2013 1:08 PM

The Morning After; Price Discovery is Zero; PUT on the Bond Market? Is Inflation Really Under 2%?

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Steen Jakobsen, Chief economist at Saxo Bank in Denmark, pinged me today with his thoughts on "the morning after" and "price discovery".

In my opinion these two paragraphs of the FOMC Statement are the key ones:

  1. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.
  3. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

#1 – Tighter monetary conditions clearly concerns them – the only reason for forward guidance as per Vice-chairman Yellen is to “direct market” to FOMC central projection – this got out of control and we now effectively have not only a put on the stock market, but also a put on the bond market. The whole financial market is now “government controlled” – Price discovery has been reduced close to ZERO – as even the term-premium (expected rate expectations) is ignored and considered invalid by Fed and its merry men.

# 2 – The wording is mild, but it’s a real concern. I have no doubt inflation, or lack of, played bigger role than anything else in taking decision to not taper. An economy with weak inflation, is an economy with excess capacity – An economy with excess capacity is not an economy healing and creating jobs – hence – Fed also de facto yesterday stated: the unemployment rate is invalid to use as gauge for future monetary policy but also as statistical indicator.
Whole Financial Market Government Controlled

In regards to Steen's comments "The whole financial market is now “government controlled” – Price discovery has been reduced close to ZERO", I agree 100% (for now).

But will "control" last forever? If you think it will, then why did we have a housing and stock market crash?

Price Stability

In regards to inflation, I have to shake my head. Inflation is not a good thing, not now, not ever. And with so many boomers headed into retirement on fixed income with few assets, inflation is even more crippling.

I have a question: Does the following chart look like price stability?

Inflation Targeting at 2% a Year

Real Disposable Personal Income Per Capita

The above two charts from my post Huge Problem With Bernanke's 2% Inflation Target Explained in Pictures.

The following two charts from Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else)  explain the income problem even better.

Real US Household Incomes

In "real" (CPI-adjusted) terms, 50% of households are no better off than they were in 1988. Let's dig a litter deeper.

Growth in Real Household Income by Quintile

The preceding two charts courtesy of; Doug Short at Advisor Perspectives.

Is Inflation Really Under 2%?

I think not. In fact I know it isn't. You just have to know where to look.

Inflation is only under 2% if you ignore soaring money supply, the stock market bubble, bond market bubbles, a reblowing of the housing bubble, and other global bubbles.

And what is so magical about 2% anyway? Why not 1%, 3%, 5% or some other number?

Asset Bubbles

Actually any price-inflation target is ridiculous. Price targets of any kind cannot accurately be measured precisely because price targets, by definition, ignore asset bubbles (including housing, which is not directly a part of the CPI).

And didn't we go down this path before? Twice?

Yes we did: first with a dot-com stock market bubble, then with an even bigger credit-housing bubble.

Was there anything stable about that? Indeed not. The Fed has a history of blowing bubbles of increasing amplitude over time.

Ridiculous Comment of the Day Revisited

Yesterday in Ridiculous Comment of the Day, I took exception to a statement made by Paul Denoon, head of emerging-market debt at AllianceBernstein Holding LP (AB), who regarding the Fed's decision not to taper said "This creates stability."

My reply ...
Really? The Fed buying $85 billion in assets a month creates stability? Denoon must live in Bizarro World along with Ben Bernanke and the rest of the Fed.

In Fed Bizarro World; One-Sided Risk Assessment; The $64 Trillion Question I asked "How in the hell is the Fed going to normalize interest rates with a recovery in full bloom, with interest rates three or four full percentages points below normal?"

Some people prefer short-term stability even when the outcome is long-term disaster.
Is the Fed doing all of this on purpose? I think not. For further discussion, please see Purposeful Class Warfare? Breathing Room for Rupee? Sheer Stupidity?

Not My Fault Says Bernanke

Whether on purpose or not (and I strongly suggest "not"), the result is the same and it looks like this comic from Merk Investments, via email from Steen.

Bernanke Wants 2% Inflation in a Deflationary World

Here's the problem in a nutshell: Bernanke Wants 2% Inflation in a Deflationary World; Who Pays the Price?

Asset bubbles and massive income inequality are the direct results of Fed policies.

For still more reading, or in case you are unconvinced about who is to blame, please see Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else).

Even though the problem is the Fed (central banks in general), coupled with fractional reserve lending and pseudo-money created out of thin air, many seriously misguided souls (including Keynesian high-priest Paul Krugman) think the answer is a destabilizing rise in the minimum wage and still more inflation!


The post as originally written made a reference to wages, but the corresponding chart shown was for real income. Wages are a subset of income. To better explain the problem, I added a couple of extra charts.

Mike "Mish" Shedlock

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