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.
To view “Inflation was inevitable after the Fed fuelled monetary growth”:
https://www.ft.com/content/2f7f1bad-ed6b-4a6a-9123-0eb024541c8a
We look forward to any comments you might have.
Category Archives: Extraordinary Monetary Policy
Now, Inflation is Clear and Global
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.
Inflation Fears Offers the Fed a Chance to Modernize with Money
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
Post-Pandemic Economic Risks
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf
June CFS Divisia money and financial liability data will be released on August 2 at 9:00 AM ET.
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.
Money Growth Falls – Inflation Threat Remains…
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.
For more on CFS Divisia money and inflation:
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf
For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Apr21.pdf
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’
Post-Pandemic Economic Risks
Professor William A. Barnett – Director of Advances in Monetary and Financial Measurement at CFS – evaluates present economic policy risks within the context of the ten-year period beginning in 1941.
The post-pandemic period could see a similar conflict between Treasury’s desire to minimize the cost of government debt finance and the Fed’s need to moderate inflation.
A primary harbinger of inflationary pressures would be a surge in liquid monetary assets held in the economy.
Unfortunately, there has been a steady decline in the quality and quantity of money market data available from the Fed – a void that has been partially filled by CFS.
To view the full article:
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf
Inflation Fears Offers the Fed a Chance to Modernize with Money
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.
We look forward to any comments you might have.
To view the full article:
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
Bubbles, Quantities and Short Sales podcast
My friend and former Salomon Brothers colleague, Larry Bernstein hosts an engaging “What Happens Next?” weekly podcast.
We spoke about bubbles, monetary quantities and short sales – covering:
– future implications for financial markets… why it’s a bubble and
– public policy, regulatory risks, and what to do.
To listen to the podcast:
https://www.whathappensnextin6minutes.com/sessions/gamestop-and-antitrust/#goodman
To view the remarks:
http://www.centerforfinancialstability.org/research/Bubbles_Shorts_021721.pdf
Thanks To A New Way Of Counting Money… This Is The Best Outlook For GDP In Years
My friend and former colleague, Raul Elizalde wrote a thoughtful piece for Forbes – “This Is The Best Outlook For GDP In Years, And We Know It Thanks To A New Way Of Counting Money.”
Raul nicely frames CFS Divisia and key issues in plain and direct language. He then offers his perspective on financial markets by incorporating CFS Divisia.
Raul is the founder, president, and CIO at Path Financial.
To view the full article:
https://www.forbes.com/sites/raulelizalde/2021/02/10/this-is-the-best-outlook-for-gdp-in-years-and-we-know-it-thanks-to-a-new-way-of-counting-money/?sh=b3a4983122c2
Robinhood and GameStop: Essential issues and next steps for regulators and investors
The hullabaloo surrounding the run up in the price of GameStop (GME) and the activities of Robinhood have generated front page news, calls for action, and allegations of wrongdoing.
However, lost in the headlines and struggles between good and bad or big and little is the issue of greatest concern to all – financial stability.
A group of Center for Financial Stability (CFS) experts
1) examine essential issues as well as
2) propose next steps.
As these are complex and multipronged challenges, we look forward to any comments you might have.
To view the full article:
www.CenterforFinancialStability.org/research/GME_Robinhood_020421.pdf
Today’s WSJ: “Corporate Debt ‘Relief’ Is an Economic Dud”
Today, The Wall Street Journal published an op-ed titled “Corporate Debt ‘Relief’ Is an Economic Dud.”
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.
We look forward to any comments you might have.
To view the full article:
https://www.wsj.com/articles/corporate-debt-relief-is-an-economic-dud-11609975810?st=3v9nhfz6u4los6q&reflink=desktopwebshare_permalink
The Great Demographic Reversal (Goodhart and Pradhan)
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.
Please find their slides at
http://www.centerforfinancialstability.org/speeches/The_Great_Demographic_Reversal_CFS.pdf