Inflation Links

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5586043/Dont-believe-the-hyperinflation-hype---dare-to-make-cuts.html

Don't believe the hyperinflation hype - dare to make cuts


http://www.nytimes.com/2009/06/21/business/economy/21view.html?_r=1


Why Inflation Isn't The Danger

Inflation Like Zimbabwe?

I think Marc Faber is great, but come on now.

CPI Drops, Does it Understate Deflation?

CPI increased by 0.1% month over month: consensus estimate was an increase of 0.3%. The year over year drop came in at 1.0%, the largest annual decrease in quite some time. Please note: both figures are seasonally adjusted. The media is reporting a 1.3% year over year drop, this is not seasonally adjusted.

Fingers are pointing to the drop in energy prices as the main cause for the falling CPI. This is indeed a major cause. Energy costs impact consumer prices directly (home heating/cooling, gasoline) and indirectly (food prices, apparel, etc.). However, the largest component of the CPI is an item called Owner's equivalent rent of primary residence (OER). OER's weight is 24.4% of the index. From the BLS:

Rental equivalence. This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market. Clearly, the rental value of owned homes is not an easily determined dollar amount, and Housing survey analysts must spend considerable time and effort in estimating this value.

When initially introduced, the rental equivalence index’s monthly movement was calculated by reweighting the rent sample to represent owner-occupied units. Starting with the CPI for January 1987, the rental equivalence index movement was based on changes in the implicit rents of a sample of owner-occupied units. As part of the 1987 revision, BLS drew a new housing sample to replace the old rent sample. The new sample had both owner- and renter-occupied housing units.



As the above graph illustrates, this component has been moving higher as home prices have been tumbling. My question is, why hasn't this component been falling over the same time frame?

Perhaps there are different dynamics in the rental market. Well, the below graph indicates otherwise. The Market Tightness index is a diffusion index. Readings above 50 indicate the market is getting tighter, readings below 50 indicate that the market is easing and 50 indicates that the market is unchanged.



So, home prices have dropped, rental markets are experiencing slack, housing affordability has improved (http://www.realtor.org/research/research/housinginx), yet OER is higher? Any thoughts on this one?

Thank you.

Inflation: PPI

The first of the 2 monthly inflation reports was released today: PPI 0.2% month over month increase (lower than forecast).

On a year over year basis, producer prices have fallen 4.7%. This is rarefied territory for our country. This is not hyper-inflationary by the way.

In fact, it is continued deflation. Don't take your eye of the ball my friends. How many hyper-inflationary periods have started with 40% declines in home prices? How many times have gold buyers tried to push the price over (convincingly) $1,000? How many jobs have been lost the the last 18 months? How much have PRIVATE & CORPORATE borrowing decreased?

There is a big jump from where we are now to hyper-inflation.

Oh, and for all of those who have been saying "the market is bidding up oil and commodities and who knows better than the market. It is self fulfilling."

Just like when oil was $140.00 bbl..................

What is Inflation?

Webster's Dictionary defines inflation as "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services."

That's not a bad definition. In fact, Milton Friedman postulated that "inflation is always and everywhere a monetary phenomenon." Rising price levels result from inflation, a subtle but important distinction from how the topic is presented in the press.

Not too long ago, The Federal reserve considered money supply the gauge of monetary policy. The weekly release of the money supply numbers was a highly anticipated event on Wall Street. The Fed has since changed its policy to monitor and modify interest rates to control money supply.

So, it is clear that determining the supply of money is paramount to declaring inflationary or deflationary episodes. One more distinction before moving on: deflation would be described a a fall in money supply, disinflation would be described as a declining rate of inflation.

M1 is the most narrow measure of money supply.

M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.

M2 includes additional financial products.

M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs).

M3 is an even broader measure of money supply.

M3 consists of M2 plus (1) balances in institutional money market mutual funds; (2) large-denomination time deposits (time deposits in amounts of $100,000 or more); (3) repurchase agreement (RP) liabilities of depository institutions, in denominations of $100,000 or more, on U.S. government and federal agency securities; and (4) Eurodollars held by U.S. addressees at foreign branches of U.S. banks worldwide and at all banking offices in the United Kingdom and Canada. Large-denomination time deposits, RPs, and Eurodollars exclude those amounts held by depository institutions, the U.S. government, foreign banks and official institutions, and money market mutual funds.

The growth of the repurchase agreement market was a major component of the expansion of bank balance sheets. In addition, the other components of M3 provide insight into the behavior of corporations and the direction of major (and perhaps fickle) money flows.

On March 16, 2006, The Fed published its last tally of M3. An announcement was made the preceding November that the incremental guidance that M3 provided was not worth the cost of acquiring the additional data. According to the press release, M2 provided sufficient data and M3 had not played a roll in decision making for some time.

This struck some market watchers as odd. Some believed that The Fed wanted to obscure the true nature of its policies. Let's take a look at whether or not this is the case. To be continued....

So What Do Those Previous Posts Mean?

What they are intended to reflect is the uber-shuffle of borrowing that is underway. The reason why inflation will not be a problem is because Treasury issuance is replacing private sector borrowing. The Fed and Treasury Department have become the last resting place of the junk that was sitting on bank balance sheets.

These assets are still over priced, there is no private sector bid at current marks. Interbank financing has only rebounded because the banks have guaranteed financing, not because they want to play nice.

Meanwhile, Back at The Fed (II)....

The above graph tracks data as of April month end. The ratio stands at $16.69 as of 5/20/09.

Meanwhile, Back at The Fed....

From the Federal Reserve statistical release H.4.1 (5/21/09):

• Leverage
• The Federal Reserve System holds $49.84 in assets for each dollar of capital

• Securities Holdings
• Holdings of U.S. Treasury Debt have decreased by $80.4 billion in 1 year
• Holdings of GSE debt have increased by $76.7 billion in 1 year
• Holdings of GSE /Agency MBS have increased by $431.5 billion in year

• Liquidity Programs
• Term Auction Credit totaled $428.8 billion
• Commercial Paper Funding Facility totaled $157.1 billion
• Other Loans totaled $126.3 billion (of which $45.7 billion is their loan to AIG)

• Non Recourse, Secured Loans
• Maiden Lane LLC: $25.7 billion
• Maiden Lane LLC II: $16.2 billion
• Maiden Lane LLC III: $20.4 billion

On the liability front: deposits from depository institutions (The Fed’s liability) totaled $955.2 billion, a $927.5 billion increase from a year ago. These deposits account for 72.4% of the growth on the liability side of the Fed's balance sheet.

More On Prices: CPI

Most measures in today's CPI report were either slightly higher or flat versus the previous month.

A note about the above graph: for CPI, the headline number is not seasonally adjusted. For PPI, the headline number is seasonally adjusted. Therefore, I have been tracking seasonally adjusted for both measures.

On that basis:

- The year over year change has been negative for the PPI for the last five months

- The year over year change has been negative for the CPI for four of the last five months

Full report:

http://www.bls.gov/news.release/pdf/cpi.pdf

Jobless Claims & PPI

Initial jobless claims moved higher form the previous report: 605,000 was the revised number for 5/2/09 and 637,000 was the number for 5/9/09. Several pundits claimed that the previous report marked the bottom in claims. This is a volatile series, but in any case, one month does not a trend make. Not even three months can always be trusted to mark a new direction.

This was the first report to include idled Chrysler workers, expect more in the next few weeks. In addition, a GM bankruptcy is all but certain.

Continuing claims skyrocketed over 6.5 million and he IUR rose to 4.9%, the job market is still sick. As I mentioned last week, it is possible that initial claims will taper off. However, job GROWTH is non-existent.




PPI rose month over month, but are still 3.5% lower than they were 12 months ago. Already, the press is claiming that this ends the deflation discussion. When will they learn?