Pusillanimous Powell: Pivoting Toward Subzero Junk

Pusillanimous Powell was at it again today on Capitol Hill, pivoting wildly as he took care to signal that a rate cut is still on track for the July meeting. Never mind, though, that by his lights the economy is in a “good place”, the unemployment rate is “close to it’s lowest level in 50 years” and “job openings are plentiful”.

Given all those good things on the Economy front and also that the Fed held the money market rate below the inflation rate for 10 years running – between April 2008 and October 2019 – you’d think that perhaps finally the US economy could shed its Fed-supplied training wheels and get along without monetary “stimulus” for at least a few quarters.

But, no, the nation’s monetary central planner-in-chief espied some “risks” and “crosscurrents” that warrant vigilance and that have strengthened the case for a “somewhat more accommodative monetary policy”. The latter phrase, of course, is code for a rate cut.

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But here’s the thing: The Fed can’t do a damn thing about any of those factors, and most certainly the wet monetary noodle of a 25 or even 75 basis point cut in the administered policy rate over the next few quarters is not going to move the needle at all.

Of course, the needle actually uppermost in the Fed’s mind is the hourly position of the S&P 500 index. Still, the spuriousness of the above Economy based rationalizations is surely a reminder of how very dangerous our monetary politburo has actually become.

The Fed heads are literally making it up by the week, day and hour as they scramble to keep the Everything Bubble aloft, perhaps partly explaining why Powell came off today sounding like the Whirling Dervish of Money.

For instance, consider the low-flation excuse. As the following passage indicates, the Fed’s inflation targeting timeframe has either shrunk to just a few months or Powell was just jabbering to keep rate cut hopes alive until some additional incoming data – like last Friday’s allegedly blowout jobs report – gives the Fed an excuse to back off.

However, inflation has been running below the Federal Open Market Committee’s (FOMC) symmetric 2 percent objective….. After running close to our 2 percent objective over much of last year, overall consumer price inflation, measured by the 12-month change in the price index for personal consumption expenditures (PCE), declined earlier this year and stood at 1.5 percent in May. The 12-month change in core PCE inflation, which excludes food and energy prices and tends to be a better indicator of future inflation, has also come down this year and was 1.6 percent in May.

Well, if you want to look at the very short-term core PCE deflator, here it is. During the last 20 months the annualized run rate has been at or above 2.00% on 13 occasions, and in between it has been all over the lot.

Moreover, during the last two months it has posted at a 3.00% and 2.30% annualized rate, respectively. This suggests, if anything, that the short-run inflation momentum is heading higher, not lower.

So whatever caused the core PCE deflator rate to swoon during Q1 earlier this year has apparently vamoosed. The short-term trend is now actually back above the 2.01% average posted for September-December of last year.

To be sure, the very idea that the Fed should adjust its policy rate or other tools in response to extremely short run blips in the inflation metric – even of the holy grail of the core PCE deflator – is ridiculous as a conceptual matter.

But even empirically speaking, how would they know whether to bob the lever up or weave the lever down based on the 20 monthly readings below? There is, in fact, absolutely nothing in this chart that says it was time to raise rates in 2017-2018, but urgent to cut them now.

Nor does a slightly longer year-over-year time frame, like Powell cited above, make any difference. To say that the 12-month rate of inflation shortfall is currently worrisome is to ignore what has happened three times since 2011. Namely, short-run anomalies quickly wash out of the year/year rate of change and what appears to be a swooning trend reverses into a rising trend.

Indeed, the chart above shows unusually low readings for June and August of 2018, meaning that the Y/Y rate is about to get a big lift (from a low prior year base effect) during the next three monthly readings. By the time ( the July and September FOMC meetings) they actually get around to cutting rates, in fact, the low-flation risk is likely to have washed out of the very metric which Powell cited in today’s testimony: They will likely be easing right into the jaws of 2.00% on the core PCE deflator.

When you look at the charts since the Eve of Donald in October 2016, in fact, you wonder exactly what all the low-flation gumming is actually about. At the former date, the PCE deflator less food and energy stood at 106.37 and in May 2019 it had risen to 111.60. That’s a 4.5% gain, which computes out to 1.80% at an annual rate.

Isn’t that close enough for government work? Well, unless you are clairvoyant and already know that readings will be significantly lower during the next 12 months. But clairvoyant, of course, the Fed heads most definitely are not.

There is a far larger point, however, with respect to the Fed’s efficacy. To wit, even if second decimal place shortfalls from the 2.00% inflation target made any difference to growth and prosperity, which they manifestly do not, it would be absolutely impossible for the Fed to close such trivial gaps, anyway.

Thus, since the Fed adopted formal inflation targeting in January 2012, the PCE deflator less food and energy has risen at a 1.55% annual rate. Yet when you disaggregate the index, it is clear that there are three distinct components and that all three of them are well beyond the Fed’s policy reach.

In the chart below, the brown line represents the domestic services component (housing, education, medical, transportation, finance, personal services etc.) of the PCE deflator. It has risen at a +2-3% annual rate without fail during the past seven years, while the durable goods component (dark green line) has steadily fallen just as consistently at a negative 1-2% annualized rate.

Accordingly, the nondurable goods component has been the tie-breaker, so to speak. That is, the overall PCE deflator has mainly oscillated within a 1.5% to 2.0% per annum band depending upon short-run fluctuations in the items – foods, energy and other commodity prices – which dominate nondurable goods.

So here is why the Fed can’t manage the inflation rate. Symbolically speaking, the negative trend in durable goods is the China Price at work. It represents cheap labor being mobilized from the rice paddies and villages of Asia into modern factories built with sub-economic debt capital.

The Fed can do absolutely nothing about that – except perhaps to recognize that it actually exports financial repression to the rest of the world. That is, to keep their exports competitive, mercantilist minded governments and central banks deliberately neutralize the Fed’s flood of weak dollars by printing even more of their own currencies.

This has made factory capital cheap and plentiful in the rest of the world, thereby keeping globally traded goods prices low – even deflationary. Most ordinary people, of course, would say this is a good thing for American consumers, but not the Fed heads who see the world through their Keynesian beer goggles.

The seven years of steadily falling durables inflation tracked by the dark green line below is the main reason for the shortfall in the aggregate PCE deflator. So either the Fed means to cancel a boon to consumers or it intends to pump up the aggregate PCE deflator with even more inflation in services and nondurables.

That is to say, apparently 2.5% services inflation year-in and year-out is not enough punishment for the overwhelming share of US households which are already reeling from soaring education, medical and housing costs. The Fed would apparently like to see services inflation in the 3-4% zone in order to insure that their overall 2.00% “symmetrical” target is delivered to the second decimal point.

Actually, the wide and persistent gap between the brown line (services) and the dark green line (durables) in the chart below makes a mockery of the entire inflation-targeting folly of our present day monetary politburo.

On the one hand, deflation is supposed to be really, really bad because it allegedly causes consumers to stop buying today, waiting for even lower prices tomorrow. But that’s just ridiculous. Based on the dark green line below, spending for durables would have collapsed long ago – which most assuredly it has not.

Indeed, since November 2014 apparel prices have dropped by 3.5%, footwear by 4.0%, information tech products by 11%, personal computers by 23% and toys by 33%. But take it from Amazon or Walmart or Target: There has been no buyers’ strike – spending on these items is at all-time highs.

At the same time, the only way the Fed could stimulate more services inflation beyond the uncomfortable levels already being measured is by causing households to borrow even more than the $15.6 trillion they already owe – so that they can buy more health care, education services or housing, thereby pushing up prices from existing suppliers.

Then again, when it comes to housing, mortgage rates are not even in the inflation indices anymore (they were taken out in the early 1980s). What’s in the index for housing is mainly a theoretical construct called owners equivalent rent that’s a made-up guesstimate from BLS surveys (i.e. what would you rent your castle for if you didn’t have to live there?) that has no relationship to interest rates whatsoever.

Likewise, we seriously doubt that lower interest rates would cause consumers to purchase even more health care that they can’t afford and don’t need. Nor is there any apparent relationship at all between interest rates and tuition, day care or the other items under the education services heading.

Yes, we know that inflation is supposedly everywhere and always a monetary phenomena according to Uncle Milton Friedman. But that’s just the point: It’s global and the pathways of transmission are far too opaque, intricate and meandering to be fiddled by a crude instrument like the Fed’s administered policy rate (see Part 2).

And that’s true in spades for the purple line (nondurables) in the chart below. The latter is driven in the intermediate term by global commodity stocking and destocking cycles, OPEC supply machinations, droughts and pestilence and, increasingly of late, by the herky-jerky credit impulses emanating from the Red Ponzi, as we have repeatedly demonstrated.

In short, there is no proof whatsoever that 2.00% inflation is better than the 1.55% per annum increase in the core PCE deflator that has actually been recorded since inflation targeting was adopted in January 2012. Even then, in today’s global economy the FOMC has virtually no tools to close the gap, anyway.

While the low-flation case for a rate cut is exceedingly threadbare, the other reasons cited by Powell today are even more specious.

That is, Powell is essentially suggesting that the Fed has declared itself to be the global broom and shovel brigade. Traveling behind the moveable circus of politicians and policy makers, it has taken on the mission of cleaning-up their droppings – whether large or small – in order that their follies may not impinge on the US GDP growth rate. Apparently to the decimal point.

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This is complete insanity and represents the epitome of institutional arrogance and mission creep among the unelected monetary politburo domiciled in the Eccles Building.

Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective. However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.

In Part 2 we will address these matters further, but suffice it to recall this: Every excuse and rationalization for easing which emanates from Pusillanimous Powell and his posse is simply a cover story for the fact that they are hostage to a massive and dangerous Wall Street bubble that they are desperately attempting to keep afloat.

Yet what they are self-evidently doing is adding kerosene to the fire, insuring that the ultimate explosion will be all the more devastating. For want of proof as to the central bank fostered madness being fueled even here and now, consider today’s revelation that there are now 14 junk bond issues in the eurozone trading at subzero rates!

You can’t make this stuff up .And the madness is intensifying rapidly.

Apparently, the craziness listed below has incepted just since the beginning of 2019. In any event, here is the subzero junk, courtesy of Bloomberg:

  • Ardagh Packaging Finance plc /Ardagh Holdings USA Inc.
  • Altice Luxembourg SA
  • Altice France SA
  • Axalta Coating Systems LLC
  • Constellium NV
  • Arena Luxembourg Finance Sarl
  • EC Finance Plc
  • Nexi Capital SpA
  • Nokia Corp.
  • LSF10 Wolverine Investments SCA
  • Smurfit Kappa Acquisitions ULC
  • OI European Group BV
  • Becton Dickinson Euro Finance Sarl
  • WMG Acquisition Corp.

Reprinted with permission from David Stockman’s Contra Corner.

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