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A Word Of Caution To The "Vibrant Economic Recovery" Optimists

Tyler Durden's picture




 

Current price levels and related trends are similar today, Bloomberg's Rich Yamarone warns, to recent periods when deflation fears forced the Federal Reserve to ease policy. To determine the course of monetary policy, the Fed, Yamarone notes, looks at a number of indicators. What is worrying today is that several of them – production and employment – are moving in a somewhat softer direction (despite MSM propaganda). For those optimists leaning toward the potential for a more vibrant economic recovery, a word of caution: Comparisons to month-ago or even year-ago levels may be deceiving.

Via Bloomberg's Rich Yamarone,

Commodity prices have been on a steady decline since mid-2011 and non-petroleum import prices have contracted at a 1.2 percent pace during the last 12 months. Given personal consumption expenditure (PCE) inflation of only 0.7 percent and an associated core PCE of 1.1 percent – both of which are important in policy deliberations – Fed officials would be justified in their concern.

Other than the obvious 2008 contraction in the general price level, which coincided with a depression and a banking crisis, the two most recent bouts of deflation worries were in 1998 and 2002. In 1998, fears of deflation among policy makers escalated throughout the year. Then-Dallas Fed President Bob McTeer noted during the Sept. 29 FOMC meeting: “Our most recent Beige Book report shows that the price picture has turned deflationary in several sectors. Weak international demand has continued to add to growing supplies and falling prices. We see price declines in gasoline, petrochemicals, oil and gas services, semiconductors, computers, primary metals, paper and paper products, and softwood lumber.” The Fed then went on to ease three times for a total of 75 basis points, bringing the target rate down to 4.75 percent.

Deflation fears picked up again in the third quarter of 2002 when PCE inflation sank to 0.7 percent and the core PCE was lingering around 1.5 percent. We are essentially at those same levels today. Ultimately, the Fed cut its borrowing target rate by 50 basis points to 1.25 percent.

 

To determine the course of monetary policy, the Fed of course looks at a number of indicators. What is worrying today is that several of them – production and employment – are moving in a somewhat softer direction. The industrial production index climbed 1.1 percent in November from a lowly 0.1 percent increase during October. The year-over-year pace currently stands at 3.2 percent. While that may seem desirable, it is a far stretch from the better than 8 percent gains posted in mid-2010. Employment growth has also taken on a flatter pattern.

For those optimists leaning toward the potential for a more vibrant economic recovery, a word of caution: Comparisons to month-ago or even year-ago levels may be deceiving.


Month-to-month changes are going to be elevated since the government shutdown of Oct. 1-17 reduced output and activity.

Similarly, October and November levels versus year-ago activity are deceptively strong due to the impact of Hurricane Sandy, which crippled the entire eastern seaboard leaving millions without power or transportation. For example, total retail sales in October last year were flat from the previous month and up a scant 0.1 percent in November from October. That makes the current year-over-year gains of 4.7 percent and 4.1 percent in November and October, respectively, appear better than they really were.

Given the fragility of the economy and the Fed’s unprecedented policy actions, a renewed threat of deflation leaves policy makers with few options.

 

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Tue, 12/17/2013 - 14:12 | 4254509 AccreditedEYE
AccreditedEYE's picture

So, more QE right? Shocked you guys suggest such a thing... remember "home gamers", that means BUY not SELL assets. I respect those stepping away from this madness, but whatever you do, don't you dare even think about shorting it cause there's an army of hedge fund managers hoping (praying, needing) that you do.

Tue, 12/17/2013 - 14:18 | 4254539 ArkansasAngie
ArkansasAngie's picture

CapEx ... it will save us all.  Won't it?

 

 

Tue, 12/17/2013 - 14:27 | 4254567 AccreditedEYE
AccreditedEYE's picture

Nothing gonna save us. Just don't fork your dough over to those waiting to take it. (and using any means necessary to get you to fork it)

Tue, 12/17/2013 - 15:31 | 4254703 sgt_doom
Tue, 12/17/2013 - 14:14 | 4254525 SDRII
SDRII's picture

" The industrial production index climbed 1.1 percent in November from a lowly 0.1 percent increase during October. The year-over-year pace currently stands at 3.2 percent. While that may seem desirable, it is a far stretch from the better than 8 percent gains posted in mid-2010."

 

Business inventory at all time high?

St Louis Fed: "Larger-than-anticipated inventory buildups can lead to so-called inventory corrections, which can
push the economy into a recession as firms scale back production and lay off workers."

 

Balance sheet recession out the door. Enter inventory.

 

Avg duration post war cycle 58 months.

 

 

Tue, 12/17/2013 - 14:15 | 4254528 ebworthen
ebworthen's picture

So what are you saying, -1.5% rates and $200 Billion/month QE?

Tue, 12/17/2013 - 14:17 | 4254533 CPL
CPL's picture

Entire world wide derivatives at an estimated 3.8 quadrillion dollars world wide is about to pop like a balloon.  Everyone might want to cancel their polices except auto and home soon.  It's going to be the ugliest anyone on the planet has ever seen.

 

Got REAL gold or Silver.  Got Bitcoins as a stepping stone?  Tick tock.

Tue, 12/17/2013 - 14:18 | 4254540 LawsofPhysics
LawsofPhysics's picture

Optimist.  So, get all the physical assets you can as soon as you can?  (including lead and lead delivery devices...)

Tue, 12/17/2013 - 14:19 | 4254535 LawsofPhysics
LawsofPhysics's picture

In general, deflation is a myth as no society/currency has collapsed/died because their purchasing power became too strong.

Deflation in bullshit "assets" that are not directly relevant to your survival?  Sure why not.

Perhaps I can interest you in a financial "product" of mass destruction?

Tue, 12/17/2013 - 14:33 | 4254589 ejmoosa
ejmoosa's picture

If your assets are deflating, it means it's time for some in that business or sector to leave.  Competition should drive some under, reducing capcitiy, and ending the deflationary cycle for that sector.

 

It kills me that so called free market capitalists do not understand the signals given that tell you to expand your business or contract it.

Tue, 12/17/2013 - 14:40 | 4254606 LawsofPhysics
LawsofPhysics's picture

"ending the deflationary cycle for that sector." -  Remind me, exactly what "product" of real value all the paper-pushers in the financial sector actually produce?

Where's Hank "tanks in the streets" Paulson to bail them out (again)?

Roll the motherfucking guillotines, nothing changes otherwise.

Tue, 12/17/2013 - 14:49 | 4254632 ejmoosa
ejmoosa's picture

I was not talking about financial deflation per se. 

What product do they offer?  They do much more harm than good by funding things that should have never seen the light of day.

They produce distorted economic results.  That's what they produce.

 

Tue, 12/17/2013 - 14:33 | 4254586 Iam Yue2
Iam Yue2's picture

"We conclude that Japan’s sustained deflationary slump was very much unanticipated by Japanese policymakers and observers alike, and that this was a key factor in the authorities’ failure to provide sufficient stimulus to maintain growth and positive inflation."

Preventing Deflation: Lessons from Japan’s Experience in the 1990s
Alan Ahearne, Joseph Gagnon, Jane Haltmaier, and Steve Kamin.

Do NOT follow this link or you will be banned from the site!