With continued uncertainty in global markets, this danger signal just hit an all-time record!
By Peter Boockvar, author of the Boock Report
September 26 (King World News) – Here is what Peter Boockvar wrote as the world awaits the next round of monetary madness: Yesterday we had Fed President Dudley expressing confidence that inflation will rebound and thus he thought more rate hikes were necessary. Another voting member did as well, Neel Kashkari, the ultimate dove who still believes .625% is the appropriate interest rate (he hasn’t yet voted for a rate increase since he started but believes in QT). He’s confused as to why inflation has been low and thus the “Fed should be under no pressure to raise rates.”…
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Charlie Evans sounded almost like Kashkari yesterday too. As Dudley is part of the troika, his view has more pull but I just want to say this about the whole inflation debate where I’m just amazed at the focus on whether inflation is growing 1.5% or 2% like it really matters. Yellen, Brainard, Mester and Bostic speak today.
It then begs the question, why are some so confused? They shouldn’t be. Over time, goods prices (particularly technology) should go down as manufacturing gets more efficient and companies source at the most competitive price point. Also, we hear all the time about how Amazon is a major factor in the decline of retail prices, which of course they are and that’s a good thing but there is a company called Wal- Mart that started this in the 1960’s with its campaign of Every Day Low Prices instead of Every Year We’ll Raise Prices By 2%.
On the flip side, we seem to have perpetual inflation in anything the US government is heavily involved in, particularly healthcare, housing and tuition via student debt (which together make up about 50% of CPI). We’ve seen nothing but inflation from these three crucial areas of one’s cost of living. The other major factor that influences inflation is the cyclical ups and downs of commodity prices and while there is a big focus on inflation breakevens, particularly from the Fed, they have some correlation between the two. Here is a chart of the CRB index (which is now above its 50, 100 and 200 day moving averages) and 5 yr inflation breakevens.
One last point as all we seem to hear from some people so confidently claim that there is no inflation, the NY Fed itself has a new inflation gauge. It’s called the Underlying Inflation Gauge. It has two parts, 1) the “full data set” which takes the CPI and adds a bunch of other variables. It clocked in at 2.74% in August from 2.64% in July. 2) The “prices only” measure which is basically most of the CPI which came in at 2.17% vs 2.09% in July. From the release, “The UIG measures currently estimate trend CPI inflation to be in the 2.2% to 2.7% range, with both registering above the actual 12 month change in the CPI.”
Here is the press release from Friday, https://www.newyorkfed.org/research/policy/underlying-inflation-gauge. In the 1990’s, the fed funds rate averaged 300 bps ABOVE the level of inflation. Now, the Fed struggles with just getting it to even with it. Herein though lies the problem, artificially low rates for so long has created a huge global buildup in debt which then makes the economy uber sensitive to changes in interest rates and central banks then get stuck.
Bottom line, I’m not making a call here that inflation is about to accelerate but I just take the other side of those that say it’s ‘dead’ as I heard one person say. Thus, the Fed is still going to be raising rates until something breaks and it will, I can almost guarantee it.
Here is a chart on the net spec short position in the VIX futures from Friday (for the week ended last Tuesday) where the short position has never been this big. This is not a good set up for a continued calm in markets (see chart below).
WARNING: This just hit an all-time record!
Also of interest…
Also of interest is this fascinating history lesson from legend Art Cashin: On this day (-3) in 1780, a rider was halted by three members of the Revolutionary Army. He claimed to have been on a romantic excursion and offered his watch as a bribe. Unusual for America, the authorities turned down the bribe and searched the captive. In his shoes, they found detailed drawings of the defenses at West Point.
So they arrested Major John Andre, Adj. Gen. to the Brits in New York. After re-reading the shoe plans, rebel officers determined that they could have only come from the American commander of the fort, one Benedict Arnold. Ironically, Arnold had gotten the early reports that a spy had been captured, so Arnold took the early horse to New York City and British safety.
Perhaps more ironically, General George Washington was arriving to visit Arnold just minutes after Benny had left. Washington was there to calm one of his best battlefield generals, said to be miffed by a passed-over promotion a year before. Washington was himself miffed that Arnold failed to greet him either at home or at the fort.
Adding to the irony was the fact that if Andre had escaped, the Brits could have captured both the fort and General Washington, thus ending the Revolution and offering you and me the chance to have kippers for breakfast.
Yet more ironically, Washington decided to talk to Arnold’s wife the next day to get a sense of any plot. He arrived to find Peggy Arnold (nee Shippen) flailing about in feigned madness. She conveniently wore poorly fastened garments. Her animated screaming about what her husband might have done tended to reveal as one commentator put it — “some things not prudently revealed.” Despite that and the fact that she was said to be the most beautiful and ample woman in the colonies, General Washington excused her as being no part of the plot.
Miraculously, she recovered of her madness in twelve hours and rejoined her Benedict Arnold in New York. Even though they would later burn Mr. Arnold in effigy, the founding fathers knew Peggy could not be part of the plot. It must have been coincidence that Arnold started selling secrets three days after he married her. And, the fact that his British connection, Major John Andre was formerly engaged to Peggy Shippen — well, things happen.
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