Goodbye Fed Credibility, Hello Stagflation – Ep. 168

Goodbye Fed Credibility, Hello Stagflation – Ep. 168


* Another volatile day in the stock market sees the major averages deep in the red
* The Dow was down just over 1%; down 180 points, 17,529
* The NASDAQ actually got walloped a little more; down just shy of 60 points, 1.25%
* I think the catalyst for today's declines was a couple of Fed officials talking about how June is a live meeting - live from the perspective of, "We might raise interest rates"
* I don't think it's live at all, I think it's dead, and if it were alive, the stock market decline would kill it
* If Wall Street actually believes that the Fed is serious about raising rates in June, the market would be tanking
* In fact, if more people believed it, the market would be down more than 180 points today
* As we got closer and closer to the date that the Fed was theoretically going to raise rates, the market would be so low, that any talk of a rate hike would be dead, because the Fed would be dealing with tighter financial conditions
* The Fed doesn't want to tighten monetary policy with financial conditions are tightening on their own
* It's interesting, too, that you hear people asking, "Why does the Fed have a June rate hike on the table"? I keep hearing about the economy strengthening
* The economy is not strengthening! That's just the point, the economy is weakening
* Yes we did get a little data in the last few days that was better than expected, buy we also got data that was worse than expected
* Most of the financial data that has come out since the last time the Fed hiked rates has been bad
* If the Fed is talking about raising rates, it's not because the economy is getting stronger, it is despite the fact that the economy is getting weaker
* What is getting stronger is inflation
* The problem is, even though inflation is above the Fed's so-called 2% target, I don't think this raises the probability of a rate hike
* If anything, the increase in prices will slow down the economy even more
* We actually got some official inflation data today, we got the April CPI
* The consensus was for a move +.3, following the prior month's +.1
* We got a bigger jump than was expected - we got +.4
* The year-over-year headline number - not the core number - is now 1.1
* So the year-over-year is below 2% but if you annualize that .4 for the next 11 months that would be a 6% annualized rate of CPI-based inflation
* I read articles about the jump in the CPI and the jist was that this is good news, because the Fed is making progress on its policy goal of price stability -
* If you think about how ridiculous that comment is:
* We had a big spike in consumer prices, which if you annualize the rate of increase that's 6% increase in prices and that's progress on price stability?
* If anything, the Fed is moving away from price stability
* If you're going for price stability, the less prices go up the more stable it is
* I don't know how much more "stability" people can stand -
* If prices get any more "stable" than this, we're going to have runaway inflation
* This is not about price stability - this is about generating inflation on purpose because there is no alternative for the Fed
* In recent times, a hotter than expected inflation number, causes the currency goes up
* And when inflation is lower than expected, the currency goes down
* Now, you might think that's counter-intuitive, and actually it is
* Why would higher inflation be good for a currency? After all, inflation measures how quickly a currency loses purchasing power
* So why would a currency that is losing purchasing power more quickly be more valuable?
* In today's world, low inflation is bad for your currency and high inflation is good for your currency
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