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Takeaway: The political rhetoric surrounding the inflationary impact of quantitative easing is poised to accelerate meaningfully.

CONCLUSION: The political rhetoric surrounding the inflationary impact of quantitative easing is poised to accelerate meaningfully from now through the general election, potentially keeping the Fed on hold with respect to that duration.

"…in a world where unemployment is as high as it is, allowing inflation to tip over the current central bank target of 2% could well be part of an appropriate policy. The central bank may have to give a little bit on the inflation front to do better on the employment front… I don't anticipate stagflation, a condition of weak growth and high inflation, returning largely because the Fed won't repeat the policy mistakes of the 1970s.”
-Federal Reserve Bank of Minneapolis President Narayana Kocherlakota (AUG 15, 2012)

From our vantage point, there are three very obvious things wrong with Kocherlakota’s statement (in reverse order):

  1. The Fed is, in fact, well on its way towards repeating the policy mistakes of the 1970s.
  2. Members of the Federal Reserve continue to blatantly confuse inflation with growth (likely because the former is far easier for them to produce), which wrongfully leads them to conclude that their Policies to Inflate are a catalyst(s) for improvement in the US labor market.
  3. Despite the disproportionally-harmful effects of headline inflation on several US consumer groups, the Fed continues to anchor on core inflation as their preferred CPI measure.

To point #1, the Fed’s holdings of US Treasury debt (some refer to this as “monetization”) as a percentage of total was 10.7% per the latest data point(s); that is the highest ratio we’ve seen since the early 1980s. Another LSAP – which members of the manic media and Federal Reserve regional banks are begging Bernanke to introduce – is likely to push this metric back into the mid-teens – last seen when then-Federal Reserve Chairman Arthur Burns was, too, monetizing Federal debts.

FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA - 1

To point #2, We continue to argue that Chairman Burns' well-documented failures in promoting sustainable economic and employment growth during the 1970s can be largely attributed to his academically-dogmatic Policies to Inflate. The chart below highlights how his stagflation-inducing rips in CPI led proactively predictable spikes in the unemployment rate.

FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA - 2

To point #3, we use BLS Consumer Expenditure Survey data in the first of the two charts below to highlight how the Fed’s “transitory” commodity inflation disproportionally impacts the poor. In the second chart, we use ICI data to highlight a common sense conclusion: poor people don’t own many stocks; thus, they are disproportionately impacted by the negative effects of QE and receive hardly any of the offsetting benefits (i.e. stock market inflation). Republican Vice Presidential Candidate Paul Ryan has been outspoken about this very topic; for more details, please refer to our note from JUN 15 titled: “WILL ROMNEY AND RYAN FORCE BERNANKE INTO A BOX?

FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA - 3

 

FIRE IN THE [JACKSON] HOLE: BATTLE LINES ARE BEING DRAWN IN THE US MONETARY POLICY ARENA - 4

Perhaps the 15.1% of the US population that is considered to be officially impoverished according Census Bureau calculations won’t matter in this election. Perhaps they will. One thing is for sure, the political rhetoric surrounding the inflationary impact of quantitative easing is poised to accelerate meaningfully from now through the general election, potentially keeping the Fed on hold with respect to that duration. Key catalysts on that front include:

  • AUG 27-30: Republican National Convention in Tampa, FL;
  • AUG 31-1: Central banker bonanza in Jackson Hole, WY;
  • SEP 13: FOMC Rate Decision, Fed’s updated economic projections and Bernanke press conference; and
  • OCT 24: FOMC Rate Decision.

With respect to Jackson Hole, we would not be surprised to see political rhetoric on the Fed’s role in the economy heat up into and through that event. Stripping the Fed of its dual mandate – specifically the “maximum employment” portion – has the potential to develop into a key political issue in the US monetary policy arena over the intermediate term, especially if the GOP is successful in its bid for House and Senate majorities. Intrade currently has the odds of each occurring at 85% and 55%, respectively.

Darius Dale

Senior Analyst