tag:blogger.com,1999:blog-1110014885778996459.post5205541961295946944..comments2024-03-29T00:15:52.716-07:00Comments on Idiosyncratic Whisk: The Phillips Curve is real.Kevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.comBlogger24125tag:blogger.com,1999:blog-1110014885778996459.post-4002937327699832042017-07-25T01:00:12.891-07:002017-07-25T01:00:12.891-07:00Normally, I think it would be great for equities, ...Normally, I think it would be great for equities, because it would be great in general. But, the problem is that the Fed sees it as a reason to tighten and to impose a contraction. That is partly because we have already imposed a housing supply shock, so that the CPI is not serene. It is a chimera composed of declining general inflation and high (mostly non-cash) rent inflation, so they will tighten even as bank lending has been frozen up for 3 quarters.<br />The difference between the 1990s and now is that in 1995 and 1998, the Fed zigged to keep the expansion going. Today they will zag.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-123495722865009282017-07-24T20:46:42.613-07:002017-07-24T20:46:42.613-07:00they r not focused on inflation. were they focused...they r not focused on inflation. were they focused on inflation, rather than the nominal Phil curve, they'd still be awaiting signs of life in the PCEMortimer Randolphhttps://www.blogger.com/profile/03461337204738090189noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-78023217340892684502017-07-24T20:43:51.351-07:002017-07-24T20:43:51.351-07:00u r a wiz, Kevin. is a tight-labor / serene CPI sc...u r a wiz, Kevin. is a tight-labor / serene CPI scenario bearish for equities?Mortimer Randolphhttps://www.blogger.com/profile/03461337204738090189noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-48969406939647259452017-07-20T16:51:25.894-07:002017-07-20T16:51:25.894-07:001. Yes.
2. Good point. I think the trick with hou...1. Yes.<br />2. Good point. I think the trick with housing is that raw building costs haven't particularly risen, which is why homes in Atlanta are still cheap. And the costs are mostly sunk costs. So, the inflation is mostly in the form of economic rents from political exclusion. Of course education and health care also have political sources to inflation. They just don't happen to be my focus. There are other items with inflation that is simply a product of technological or physical factors. My main point here is that housing inflation is unnecessary and unjust.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-88994757988861431922017-07-19T04:51:25.294-07:002017-07-19T04:51:25.294-07:00Two separate comments: 1. The S&P 500 is abou...Two separate comments: 1. The S&P 500 is about 50% higher than it was 10 years ago. Maybe less than 5% per year due to compounding. This is hardly bubble territory. 2. It seems that certain items always have inflation rates that are higher or lower than average. For instance, college costs and medical have almost always had price increases greater than core CPI. Electronics prices always seem to be falling. This is more of an observation than a point. billnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-52329112965640926052017-07-14T08:41:26.426-07:002017-07-14T08:41:26.426-07:00I was more thinking along the lines of how you wou...I was more thinking along the lines of how you would square this with the neutrality of money (or if you don't believe in any of the forms of neutrality of money). Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-77313581475007171242017-07-13T20:35:19.049-07:002017-07-13T20:35:19.049-07:00Are you talking about when operating profits had t...Are you talking about when operating profits had to be higher in the 1970s to account for the "inflation tax" or some Austrian mechanism in the business cycle?Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-64491596882825557622017-07-13T11:28:54.864-07:002017-07-13T11:28:54.864-07:00Another good to great piece, but I am not sure you...Another good to great piece, but I am not sure your conclusion is founded.<br /><br />You are using real returns for relationship between profits (or expectations) and wages, you still have to draw the line between fed looseness and permanently higher real profits. Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-91488662104747472992017-07-13T08:19:14.136-07:002017-07-13T08:19:14.136-07:00It was like a snowball. It started as a slight tig...It was like a snowball. It started as a slight tightening. Then things kept getting worse. There are too many details to outline in a comment. The whole process takes several book chapters to describe. If you're interested, you can read them when they are published.<br />Consider, as a start, that most defaults and most of the decline in low tier home prices happened after the Fed's disastrous Sept. 2008 meeting and after the GSES were taken over and completely cut off lending to low tier markets. In the end, it was largely post-2008 housing outcomes that justified the defaults of CDOS in 2007.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-71245300795124117062017-07-13T07:25:16.613-07:002017-07-13T07:25:16.613-07:00The question is why there was a multi-sigma housin...The question is why there was a multi-sigma housing bust. The Fed has been a little too tight many times in history with no "multi-sigma" crisis to show for it. Not to mention a multi-sigma commodity boom-bust. There is something unique about our current period...and I can't imagine it has anything to do with minor deviations from "perfect" (in hindsight) monetary policy.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-42609773470282720832017-07-12T15:24:39.578-07:002017-07-12T15:24:39.578-07:00Im sure there are wyas our system could be more st...Im sure there are wyas our system could be more stable. But our financial system wasn't fragile. It took a multi-sigma housing bust followed by discretionary Fed tightening and a federal takeover of the mortgage market that led to millions of unnecessary defaults for there to be systemic failure.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-75679327110877524242017-07-12T13:13:35.414-07:002017-07-12T13:13:35.414-07:00Core CPI was >2% all of 2005 through late-2008....Core CPI was >2% all of 2005 through late-2008. And of course you had overall CPI much higher (which holds down core CPI since more money spent on oil is less spent on other goods). The Fed was right to be concerned about inflation.<br /><br />I don't believe 100bps one way or the other is the driving force behind investment. Residential investment peaked 1Q 2006. Business investment peaked late-2007. If it was central bank policy determining investment it would have been seen broadly throughout the economy...it was not. <br /><br />Even if i were to assume that the Fed tightened too much for the wrong reasons, I am still left with the big question of why our financial system has become so fragile. Since Greenspan we've had the most forward-looking, data-driven, recession-wary Federal Reserve in history. And over that same period we've had the largest boom-bust cycles since the great depression. I keep hearing demands that a "very good" central bank become "perfect" and that will solve our problems. Not a chance. I'm actually inclined to believe the opposite...the more volatility the Central Bank takes out of the economy, the more leverage private actors are comfortable adding...meaning that any slight deviation from the expected path risks a massive crisis.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-16031910950046060102017-07-12T07:35:36.268-07:002017-07-12T07:35:36.268-07:00Iirc, they mentioned housing in most meeting pr...Iirc, they mentioned housing in most meeting pr's during the period, though they were also worried about inflation. In August 2007, the yield curve had been inverted for nearly 2 years, the WSJ said leaving rates at 5.25% would cause a panic, and this is why they supported that. Bernanke saw that op-ed, led the FOMC to hold rates at 5.25%, and there was a panic. Core CPI was only relatively high bc the Fed had already triggered a collapse in housing starts, which began predictably when the yield curve inverted. Core CPI outside of shelter inflation was down to close to 1%. Inflation should not have been a worry.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-23283968715868045082017-07-12T05:34:59.322-07:002017-07-12T05:34:59.322-07:00First, I dont think housing weighed heavily on the...First, I dont think housing weighed heavily on the Fed. I think the big CPI prints did. They know well that once you lose a grip on inflation things can spiral quickly.<br /><br />Second, you're missing the bigger point. A (potentially) modest overshoot in tightening should not, by any stretch of the imagination, result in a global financial catastrophe. If the financial is that fragile there is something very rotten. The focus should be there, not on monetary policy (which was roughly as expected). Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-90164885757148276972017-07-11T21:44:41.048-07:002017-07-11T21:44:41.048-07:00Markets don't engage in short-termism. This i...Markets don't engage in short-termism. This is public policy by attribution error.<br />None of the more stable inflation measures ever were much above 2%, and the Fed tightened knowing that this could trigger panics and a crisis. Home prices weren't out of historical norms because of loose money or irrational expectations. But since so many people mistakenly think that, the Fed tightened way too much.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-92229860622914546512017-07-11T17:50:51.316-07:002017-07-11T17:50:51.316-07:00Well, I can die and go to heaven now. Finally, som...Well, I can die and go to heaven now. Finally, somebody else has said of the Fed, "Let it rip." <br /><br />Frankly, I think the Fed should shoot for Full-Tilt Boogey Boom Times in Fat City. <br /><br />Since anecdotes are in fashion to support Fed policy (labor shortages, etc) here are a couple anecdotal observations, although they are serious enough.<br /><br />1. Any business with large fixed costs experiences declining per unit costs when production goes up. I saw this directly in my years in furniture production. It is one reason for the commonly seen "volume discount." <br /><br />2. Businesses invest in new plant and equipment when demand all but forces them to. Buying new plant and equipment is risky and time-consuming. It is always easier to slap on some more hours, or turn away new demand by price rationing (when possible). <br /><br />In general, new plant and equipment must be obviously better and there must be a lot of pent-up demand waiting before businesses take the plunge. <br /><br />The best thing the Fed could do is shoot for robust growth for the next 10 years or so. <br /><br />Also remember, higher prices brings new supply (except as pertains to real estate in zoned cities). Higher oil prices have been wonderfully successful in bringing about new supply. Suffocating every price rise in the cradle ensures slower introductions of new plant and equipment. <br /><br />A peevish fixation on inflation is not a monetary policy. <br /><br />Final thought: Oh, the Fed can tighten up. But if sustained, that will likely only lower long-term rates. We will be right back where we were before---very sluggish growth and dead interest rates. Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-17790749249723976622017-07-11T15:00:19.411-07:002017-07-11T15:00:19.411-07:00I don't think any level of inflation (or defla...I don't think any level of inflation (or deflation) necessarily leads to a crisis. After all, we've seen plenty of periods of deflation with good RGDP growth, and plenty of periods of very higher inflation with good RGDP growth.<br /><br />I think a crisis is likely to occur when one set of expectations is firmly entrenched and another scenario plays out. And i think those crisis are magnified when leverage is high as bankruptcy is a disruptive process (more so than simple loss of equity value). Given the tendency for markets to engage in short-termism/mimicry/momentum I think we have a system that is prone to extrapolate fragile assumptions long into the future...with leverage.<br /><br />During the last cycle I believe that low-ish real rates and a Fed unconstrained by inflation were seen as reliable assumptions for the long-term. When inflation hit 17-year highs "out of nowhere" thus forcing the Fed tighten in a hurry (or abandon it's inflation mandate), those market assumptions went from "given" to "gone" in a short time frame. Anyone operating on the old assumptions (particularly with a high degree of leverage) faced financial distress.<br /><br />Perhaps you are in favor of raising the inflation target. I would counter: 1) I don't see what 3% accomplishes that 2% doesn't, 2) the Fed has spent decades establishing credibility, it best have a very good reason for changing the rules of the game, 3) a change of mandate invites Congress to become actively involved as the mandate is now seen as "negotiable," and 4) changing the mandate creates massive structural winners & losers...this should be decided by voters, not central bankers.<br /><br />If the Fed had reacted earlier to the initial inflation overshoots, we probably would have never seen the 5%+ inflation of 2008 and avoided the rapid tightening. Smaller, more frequent, risk unwinds are highly preferable to large unwinds. There is some degree of value to injecting a bit of volatility into the system to keep certain beliefs from becoming overly entrenched.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-17010234324244936752017-07-11T14:16:37.536-07:002017-07-11T14:16:37.536-07:00Their error wasn't being too loose. The error ...Their error wasn't being too loose. The error was thinking they were too loose.<br />Can you point me to literature that shows how 2.5% inflation leads to crises?Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-87761744471049533362017-07-11T14:15:23.885-07:002017-07-11T14:15:23.885-07:00Thanks Sean.Thanks Sean.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-90782779862206414892017-07-11T13:25:34.201-07:002017-07-11T13:25:34.201-07:00I'm not even referring to housing necessarily....I'm not even referring to housing necessarily. The Fed lost control of inflation due to inadequate risk assessment. The overshoot of CPI from the 2% target was 3x greater in the 5 years preceding the financial crisis than the undershoot was in the 5 years post crisis. And yet we react as though the post-GFC period is some massive lapse in central bank judgement. The massive lapse was in the pre-GFC period. Inflation is not linear with demand and you cannot necessarily see it coming by watching economic data. If a central bank is too easy for too long, that may not be apparent until inflation suddenly shoots higher...at which point central banks will have to tighten in a hurry and certainly create some degree of havoc in asset markets. With massive leverage in the system and high asset values (relative to underlying cash flows) you simply cannot raise the cost of money in a hurry. A central bank should err on the side of caution in terms of future inflationary conditions. The Fed did not last cycle and thus had to react to inflation in a hurry.<br /><br />My hunch is we are doing exactly the same thing again. But only time will tell.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-90055763589871192962017-07-11T09:32:04.779-07:002017-07-11T09:32:04.779-07:00...in fact - that line is essentially why politics......in fact - that line is essentially why politics adds so little true value to our lives.Anonymoushttps://www.blogger.com/profile/06234426239124672535noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-4165949318618735942017-07-11T09:30:40.876-07:002017-07-11T09:30:40.876-07:00Great article Kevin. Deserves to be widely read. T...Great article Kevin. Deserves to be widely read. The line, "Negotiating power is a fixed pie mechanism." is one for the ages!Anonymoushttps://www.blogger.com/profile/06234426239124672535noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-25371861565619243542017-07-11T08:21:09.378-07:002017-07-11T08:21:09.378-07:00Unfortunately a lot of people agree with you.Unfortunately a lot of people agree with you.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-64664913668700474092017-07-11T06:16:35.191-07:002017-07-11T06:16:35.191-07:00We gave a hotter cycle a chance last cycle. CPI wa...We gave a hotter cycle a chance last cycle. CPI was >2% most of 2004 through 2008. At first there were no apparent issues. Then there were. I think the Fed is wise to assess risks that may take years to appear. Anonymousnoreply@blogger.com