Citi Economic Surprise Index
CPI and 5 year x 5year Forward Inflation Expectations
Inflation, as measured by CPI, is well below any other inflationary reading since the financial crisis. While CPI has stabilized it remains significantly lower than the range where prior monetary easing occurred. Additional CPI weakness is likely if the U.S. dollar continues to appreciate and thus forces commodity prices lower and further increase imported deflationary pressures. Recently released data supports this claim. Import price data released September 10, 2015 fell 11.40% (year over year), its 13th drop in a row. CPI weakness is not just 720 Global’s prediction, implied inflation expectations also point to a similar inflation outlook, as seen in the second chart below.
CPI (year over year % change)
Illusion or Reality
As was the case in March, the data continues to suggest that the Fed is contemplating actions inconsistent with those they have taken in the past. It is possible the Fed is motivated to increase interest rates to support the illusion that their higher interest rate projections and rosy economic forecasts are finally coming to fruition. In the infamous words of George Bush “mission accomplished”. Based strictly on the facts, 720 Global begs to differ.
It is incumbent upon investors to separate illusion from reality. Economic growth rates of years past are not likely in the years ahead. Enormous amounts of debt amassed over the past 30 years coupled with scant productivity growth will continue to choke economic growth. For over 2 decades Federal Reserve monetary policy has been devoted to the stimulation of debt growth via low interest rates and more recently a sharply increased money supply. It is highly likely the blood has been drawn from this stone and the economy is left with a debt burden that has become too onerous to service.
Investing in such a misunderstood and distorted economic environment is fraught with risk especially for those failing to grasp this reality. While current Fed monetary policy is clearly unsustainable, the Fed runs the risk of severely damaging asset markets with any deviations from such policy.
Questionable Track Record
This article concludes by highlighting the lack of appreciation by the Fed, many economists and market participants for the debt burden and its deleterious effect on economic growth. We start with a reminder of the incredible lack of foresight Janet Yellen, Federal Reserve Chairwoman, had prior to the financial crisis of 2008/09 and then continue with comments, quotes, charts and statistics that demonstrate the inaccuracy of the “conventional wisdom” that has prevailed through much of the time period after the financial crisis.
“For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the SIVs — I didn’t see any of that coming until it happened.” 2010 Janet Yellen
continue reading about the Fed’s monetary policy and unrealized expectations over the past 5 years…
