According to the Bureau of Labor Statistics, consumer prices are rising at a 2.1% annual rate. This suggests to us that the current stock market boom will die with a bang, rather than a whimper. The Dow rose 98 points yesterday in anticipation.
Fed economists say they don’t think inflation rates are rising. (See more below from Chris.) They think the most recent reading is a fluke. But why does anyone take them seriously?
Prakash Loungani, an economist working for the IMF, undertook a study, not so much to find out as to gawk and laugh. It was published in 2001 in the International Journal of Forecasting.
For those of us who have been following the story, there were no surprises in it. “The record of failure to predict recessions is virtually unblemished,” he reported.
That was in 2001. Surely, by 2014, the experts had managed to stain their pathetic record with some success?
Nope. Loungani and a colleague, Hites Ahir, took another look. They examined 77 different national economies, of which 49 were in recession in 2009. In 2008, how many economic forecasters saw the recessions coming a year later?
Go ahead, dear reader, take a guess.
The answer is zero. Recession or no recession? It’s a binary question. You’d think a few would have gotten the right answer by chance. Instead, none did.
She needn’t have bothered asking.
It didn’t matter whether the economists were working for private companies or for the government. The predictions they made were terrible.
Economists didn’t see the recession of 2009 until it had crashed onto their heads – after the markets had been cut in half and Wall Street had come within a hair of going broke.
Then their eyes were shocked open. Everywhere they looked they saw recessions – even where there were none. They predicted recessions in 54 of the 77 economies studied by Loungani – six more than actually had them.
Which brings us back to the Fed. Its Dynamic Stochastic General Equilibrium model makes forecasts; they are always wrong.
For example, back in 2011, the Fed’s model predicted economic growth in the US of about 3.5% for 2014. Each quarter the Fed adjusted the reading downward, as the future approached the present. Now, it is projecting growth for this year of barely 2%.
Quack, quack, quack… Why do people pay them any attention?
But not only do they listen, they salute… and implement trillions of dollars in fixes and fiddles, many of which result in disaster. It is as though George Armstrong Custer rode to the Little Bighorn on the advice of a palm reader.
You might say we are not giving the devil his due. Economists have “avoided another depression,” you might say. And they’ve even managed to bring volatility down to levels that haven’t been seen in 10 years.
This despite adding $10 trillion to central bank balance sheets… goosing up the stock market 150% since 2009… and swamping the planet with corporate, student and sovereign debt.
“Volatility extinguished by moves from central banks,” was a recent headline in the Financial Times.
The VIX – Wall Street’s “fear gauge” – is at only about 14. At the height of the crisis, in 2008, when Ben Bernanke warned Congress that if it failed to act by Friday “we may not even have an economy on Monday,” it was at about 80.
Now investors scarcely bother to read the headlines… and prices barely budge. Surely, preventing prices from going up and down – that’s an achievement, right?
Well, you can say we’re “old school” on this one. We believe prices should be allowed to do anything they damn well please. After all, they’re trying to tell us something.
Prices, according to the classical economists, were not to be set. They were to be discovered. And where they are found tells you something.
High prices bespeak scarcity, and the need for more investment. Low prices shout abundance… or even surfeit… warning you to stay away. Gagging prices serves no purpose at all.
Besides, do you remember the Great Moderation?
In the mid-2000s neither the whine of recession nor the growl bear of markets could be heard. House prices rose. Stocks went up. The economy appeared to be in a sustained expansion, caused largely by the Fed’s manipulation of mortgage credit.
Even as late as 2007 no respectable economist gave out a peep of warning.
And that sound you don’t hear now? That eerie calm in the markets? That is the sound of prices that are not allowed to speak their mind…
But oh… Prices that do not speak whisper softly to an o’er-stressed economy… and bid it to break down or blow up.
Tomorrow: Despite all the manipulation, the price of hourly labor is back to where it was in 1968.
What does that tell us? Stay tuned to find out…
Don’t Bet on Low Interest Rates Lasting Long
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Legendary former Merrill Lynch strategist Bob Farrell had a useful maxim: “When all the experts and forecasts agree, something else is going to happen.”
Right now, the consensus is that the interest-rate cycle is dead… along with inflation.
On average, Fed officials have projected the benchmark federal funds rate would hit 1.2% by the end of 2015 and 2.5% by the end of 2016.
Over the longer run, officials on average said the target interest rate could settle in at a lower-than-normal 3.75%, down from earlier forecasts of 4%.
But if Farrell is right… those forecasts aren’t worth a damn.
For a start, the official consumer price inflation rate just moved up to 2.1% year over year. That’s already above the Fed’s target inflation rate of 2%.
And the official unemployment rate is now 6.3%… and likely heading south of 6% by the end of the year.
That means a rate hike could be on the table well before the consensus sees it happening… or the Fed risks losing credibility over inflation.
Investors overexposed to bonds when rates jump will lose their shirts.