The bull market must really be into disingenuousness
U.S. Federal Reserve chair Jerome Powell is trying to find any reason to keep on tightening, writes David Rosenberg. Photo by Win McNamee/Getty Images Remember in the first half of the year when real gross domestic (GDP) in the United States was contracting, and U.S. Federal Reserve chair Jay Powell instructed us to focus on real gross domestic income (GDI), which had yet to decline. He informed us that he expected GDP to follow GDI, but now that the latter is falling as the former bounced in Q3, not a word about gross domestic income.
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And remember when Powell was asked about the yield curve, and he told the crowd from the podium not to worry since he had his economic staff concoct a less threatening yield curve — the spread between the three-month Treasury yield and the three-month yield 18 months out — and even when the traditional 2s/10s gap did invert, he told us that this favourite curve had yet to do so. And then it did. Crickets.
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And now, after oscillating between headline and core inflation in terms of what is important to watch, Powell tells us that — just as rents and products are deflating in real time — he is now paying attention to the ex-goods/ex-shelter personal consumption expenditures (PCE) deflator. What? He is saying he is now targeting just 50 per cent of the pricing pie — the rest be damned. And he gets away with it. The press and the majority of economists and Wall Street types love this guy. The bull market must really be into disingenuousness. Make it up as we go along.
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Strip out shelter and strip out goods, and instead of the PCE deflator showing some good news with a tepid 0.1 per cent increase in November and the core coming in at 0.17 per cent, we are left with this new Powell inflation indicator, which omits half of what consumers bought, coming in at 0.26 per cent instead. Oh, that year-over-year trend of 4.3 per cent is simply far too high for these zealots, even if it was more moderate than October’s 4.7 per cent.
But think of what it means when the Fed is ignoring half of the price index, and the half it is now focused on, well, half of that half is in health care, education and financial services, much of which is imputed by the Bureau of Labor Statistics, and none are responsive to monetary policy in any event.
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Look, as we have said before, this Fed is trying to find any reason to keep on tightening. And it isn’t really about the economy or consumer inflation. It is about asset inflation. It is about financial conditions. It is all about taking the punch bowl away.
We have a Fed chair constantly referring to himself as the modern-day Paul Volcker, and Volcker is not remembered and idolized for creating the conditions for back-to-back recessions, a doubling in the unemployment rate and a three-year bear market. Nope. He goes down as the dean of central banking for destroying inflation, which he did by destroying aggregate demand. What was the Volcker put in August 1982? An 8x P/E multiple.
Oh, how can I forget? The other message from the Fed is that wages are running too hot. That is a bad joke. It seems lost on almost everyone that U.S. wages have lagged prices each and every month since April 2021. Average hourly earnings are running 1.9 per cent behind the rate of inflation. And yet the Fed and bond vigilantes are consumed with wages running too hot.
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Every model I know of shows it is inflation and inflation expectations that drive wage growth; wage growth does not drive inflation. The causation runs the other way. But, again, this Fed is trying to find any reason to tighten, break the multi-decade extreme relationship between the financial economy and the real economy, and extinguish the notion that there is a “Fed put.”
Recommended from Editorial David Rosenberg: The great reopening of China may not be as great as you think David Rosenberg: A recession is coming to Canada in 2023 amid huge debt, housing bubble Notice there is now little lip service paid to JOLTS “job openings” of late. Maybe because they have plunged 1.5 million since March. But at every opportunity, Powell will talk about how the 10.3 million openings still far exceed the six million unemployed. Never does he mention that the official unemployment statistics are grossly understated and that the total pool of available labour stands at 11.6 million — 13 per cent more than the number of openings.
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Article content But don’t ever think for an instant that this is a number you will ever dare to hear from the cheerleaders. Believe me, if the labour market was so tight, and “worker power” so intense beyond busboys, bell captains, black-jack dealers, bartenders and burger flippers, we wouldn’t be seeing wages continue to get bottled up like this in real terms.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. You can sign up for a free, one-month trial on Rosenberg’s website.
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