Today my letter in the Financial Times (FT) responds to Howard Marks’ “Investors must not bet too much on macro forecasts.” Marks offers a superb road map for navigating future inflation twists and turns.
However, he misses how macro rules of nature can often be measured – helping investors and public officials better achieve their respective goals.
Monetary measurements represent simply one meaningful mapping.
Across the board higher consumer price inflation in the United States removes any ambiguity or doubt regarding the existence of price pressures beyond transitory or base effects.
Overall consumer prices increased by 5.4% on the year ending in June. Core inflation increased by 4.5% over the same period. In fact, in the last 4 months, both overall and core inflation exceeded market expectations and increased relative to the previous month’s release.
The phenomenon also extends well beyond simply the United States. It is global.
A diffusion index of every inflation release relative to the prior release for 49 countries shows an upward impulse since the beginning of the year. More pointedly, a diffusion index of reported inflation relative to expectations for the same complex of countries illustrates how actual inflation has been exceeding expected inflation especially since May 2021. (see Figures 1 and 2… www.CenterforFinancialStability.org/amfm/studies/Global_inflation_071421.pdf)
The Center for Financial Stability (CFS) has been clear about risks and financial stability implications. Our first email on April 22, 2020 noted how the initial impulse in the signal from CFS broad money would be a period of disinflation followed by inflation.
CFS broad money growth slowed to 12.1% on a year-over-year basis in the latest reading for April down from 23.8% in March.
The initial response might be to assume that the large expansion of money is reaching an end. This would be a mistake. The “base effect” elevating monetary growth on a year-over-year basis began to end in March 2021 and fully finished in April 2021. A few issues include:
CFS Divisia monetary growth of 12.0% in April dwarfs average growth of 5.6% since 1967 (DM4- excluding Treasury bills).
A high frequency reading of CFS monetary data stretching back over 54 years portrays a radically different perspective regarding the performance of broad money and its implications for inflation. It highlights how broad money growth and inflation risks are actually beginning to accelerate (chart available on request).
On April 22, 2020, we were early and clear in our email message “CFS Money Growth Soars to double digits.” The initial impulse embedded in the signal from CFS broad money would be a period of disinflation followed by inflation.
Going forward, inflation will likely continue its upward ascent and stretch beyond the Fed’s comfort zone.
The present global macro backdrop for investors and officials is one of the most challenging and complex in decades. We look forward to any comments you might have.
Bloomberg terminal users can access our monetary and financial statistics by any of the four options:
1) ALLX DIVM 2) ECST T DIVMM4IY 3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’ 4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’
Investors and the public are right to worry about inflation. Yet, measures to predict the impact of Fed policies on inflation, the economy, and financial stability are of deteriorating quality and being disregarded.
Market participants and especially officials must recognize that quantities of money matter now more than ever. Gyrations of the Fed’s balance sheet are at heights not witnessed in over 100 years.
Here, the Fed is moving in the opposite direction of its Congressional mandate (Section 2A) by increasing the money supply far in excess of long-run growth.
Since 2012, the Center for Financial Stability (CFS) has offered the public alternative monetary measures – pioneered by Professor William A. Barnett.
From this work, we now know that measuring activity in the financial system better predicts both inflation as well as financial instability risks.
CFS Board Member and former FDIC Chair Sheila Bair and I note how:
Conservatives accuse progressives of wanting to destroy capitalism. Yet a greater threat than Bernie Sanders is the prospect of serial market bailouts by monetary authorities.
The creation of the corporate facilities last March marked the first time in history that the Fed would buy corporate debt. The plan went far beyond previous quantitative easing.
– There is not much evidence that all of that cash went toward creating and preserving jobs in the U.S. – Corporate facilities merely intensified the damage that monetary interventions had already dealt to U.S. capital allocation.
Capitalism doesn’t work unless capital costs something and markets don’t work unless they are allowed to rise and fall. Corporate facilities should not become part of the Fed’s standard tool kit. Let them die.
Last week, we hosted a roundtable discussion with CFS Advisory Board Member Charles Goodhart and his co-author Manoj Pradhan.
The Great Demographic Reversal is superb. It addresses head-on demographic forces that will only gain in importance over time. The book proposes that the underlying forces of demography and globalization will shortly reverse three multi-decade global trends – it will raise inflation and interest rates, but lead to a pullback in inequality. Charles and Manoj broadened the country-by-country demographic analysis by connecting many global threads and interactions among nations.