“Reality is merely an illusion, albeit a very persistent one.”
Today’s reality is that American and European governments are Keynesian. That is, they believe that government spending is the answer to growth, and that government’s heavy hand doesn’t perpetuate the unemployment they whine about or the inflation that they aren’t allowed to talk about.
Retiring Fed Head, Donald Kohn, made comments in San Francisco last night that summarize the illusion that he needs to create: “I expect unemployment to come down only slowly from its current elevated level”… and… “inflation will remain low for a while.”
Now, let’s set aside that Kohn has been at the Fed forever and missed seeing any of this mess coming since he joined the Fed’s Board of Governors in 2002, and consider the reality of this two-factor Fear Mongering Fed Model that he and his always dovish friends, Janet Yellen and Bill Dudley, have recently echoed:
- Unemployment: At +9.7%, it's high. Anyone with an internet connection gets that. It’s also the most lagging economic indicator we have, and it’s rolling over sequentially versus its peak where some at the Fed were forecasting the Great Depression.
- Inflation: Headline inflation (CPI) rolled over in February on a month-over-month basis to +2.1% year-over-year (yes, even the calculation that they have changed 9x since '96 to numb it down is up), and is setting up to shoot up again, sequentially, in March.
Yes, there are forecasts embedded in my considerations. This is what people who manage risk proactively call “making a call” before something happens and you can hold me accountable to it (March CPI will be reported next Wednesday). Reality’s Illusion is that Washington group-thinkers still thinks that “core” inflation is benign, because the Fed model is a reactive one that’s based on yesterday as opposed to today and tomorrow.
I talked to the Chairman of MFS and author of “Too Big To Save”, Bob Pozen, about this last night on Bloomberg TV. I asked Bob if the real problem with the Fed and the said leadership of American finance is whether or not the Fed operates with an ideology rather than a proactive risk management process. He said yes. Coming from a leader who is marked-to-market every day by his clients, the answer here was not surprising.
I understand that 2008 seems like forever ago, but the realities of what created this crisis are not illusions. In 2008, on the topic of ideology versus empirical process, Rep. Henry Waxman asked Alan Greenspan, “do you feel that your ideology pushed you to make decisions that you wish you had not made?”
Greenspan: “Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to – to exist, you need an ideology. The question is whether it is accurate or not. And what I am saying to you is that I found a flaw.”
So there you have it Mr. Bernanke and Mr. Kohn. What have you learned from the crisis and why are we still managing go-forward market risks based on a failed ideology? Markets change and so do facts; what do you do Sirs?
The reality is that Glenn Stevens at the Reserve Bank of Australia, Albert Einstein, and Darwin for that matter, would never sign off on individuals garnering so much political power that they allow their ideologies as to a way something “should” work override the data. It’s lunacy.
A persistent illusion that Keynesian economics is the written gospel of God is what brought us the inflation of the 1970s, and for whatever reason now all the Keynesians out there think “it’s different this time” because they can print moneys from the heavens. Food in India may indeed by falling from Ben’s helicopters right now, but its +18% more expensive than it was last year!
While the US Federal Reserve and European Central Bank mark their ideologies to their political models, the inflation data continues to roll in. And yes, inflation is marked-to-market.
Anyone who needs to put gas in their car or food in their children’s mouths around this good world get that, but now were even seeing inflation spikes on conflicted government data.
While I am still forecasting here, I’m also staring down the latest data on my sheets from this morning’s global macro run:
- British Producer Prices (input prices, as in the price of things someone needs to pay to make something they want to sell) were up +10.1% year-over-year for the month of March. That was the highest reading since May of 2008, when Bernanke didn’t think $150/oil was inflationary.
- Oil prices are trading in a Bullish Formation (bullish across all 3 of our risk management durations: TRADE, TREND, and TAIL) at $86.16; that’s up +12-21% from the WTIC oil price that was imputed into the February CPI and PPI reports don’t forget.
- The US Dollar Index continues to make a series of higher-highs and higher-lows at the same time as US Treasury yields continue to make a series of higher-highs and higher-lows.
Suggesting that the both Mr. Bond Market and Mr. Currency Market have this wrong alongside Dr. Copper (who is trading up at $3.61/lbs this morning; up +26% from the February lows that the Fed is straight-lining as their “benign inflation” assumption), and that the Fed’s flawed ideology is right, is something for analysts far braver than I to accept as an illusion that will be this debt laden world’s long term reality.
My immediate term support and resistance lines for the SP500 are now 1178 and 1194, respectively.
Best of luck out there today,