Inflation (Expectations) Is Anything But Confusing
Before the word “taper” ever left the lips of anyone occupying an official position at the Federal Reserve in the late spring of 2013, there was already something very much amiss. Not that you would have known it, of course. In the financial media, everything was moving along swimmingly, Bernanke the thrice-crowned hero. QE4 had been dutifully buried by its members getting combined within QE3, both of them still powered up at full throttle.
Since QE3 plus QE4 together were the largest of these “money printing” episodes, “everyone” said Bernanke’s biggest problem moving forward would be inflation. The unemployment rate was dropping fast (though why?) and the near recession of 2012 yielded to at least a reflation (though it was called recovery over and over and over again).
But in February 2013, man, repo. “Something” was going wrong so far as collateral redistribution was concerned. Deep inside these funding markets Treasuries were being priced as if they were massively in demand – to the point the GC rates were way, way out of whack.
Forget about it, all the repo “experts” exclaimed. The Treasury market was surely short all the UST’s anticipating Bernanke losing control on the inflation side; he’d done too much, you see, which tilted risks toward upside inflation (and growth) which would make the BOND ROUT!!! predictably inevitable.
Shorts – not collateral – became the mainstream narrative where the smallest part of the mainstream paying attention to these things had been concerned.
It may have sounded plausible but there were just too many pieces of evidence pointing in the other direction; starting with the repo market itself. There were warnings all over it from around mid-February 2013 forward. I wrote in early June 2013, the spate of these seemed unwilling to subside:
The problem of QE, as we saw all too well in 2011 as QE 2 ramped up, is it active[ly] removes vital collateral from repo circulation. QE 2 was particularly insidious in that regard because of its focus on bills – the security most often associated with repo. Operation Twist “fixed” that problem by “selling” bills back into the markets and replacing them on the Fed’s balance sheet with notes and bonds.
Earlier in March 2013, there was curious activity in the 10-year US treasury repo market, with repo rates dropping all the way to the 3% fail penalty “floor”. I noted at the time that it appeared QE 4 was having a negative impact in US treasury repo liquidity, including a noticeable uptick in repo fails.
Which one was right? Had the Treasury market been heavily short anticipating increased QE3-4 successes and with them higher risks for runaway inflation leading to the BOND ROUT!!!? Or, had it been deflationary repo problems once again threatening to interrupt reflation before it could become recovery, yielding instead higher risks of the second false dawn since the Great “Recession?”
Well, for one thing, while the Fed’s balance sheet was still rising at a forty-five degree angle (“money printing”), inflation expectations across the TIPS market were falling on an even steeper inverse slope (shown below). Central bank at full throttle, two QE’s concurrently, and the bond market looking past all the “monetary accommodation” at still the same factors the media leaves undiscovered in the shadows.
It’s been downhill ever since; not just in terms of inflation, obviously. Economic growth, which is what we’re really talking about, macro slack, was short-circuited yet again right at the moment everything was slated to be taking off for good.
In pure inflation terms, February 2013 represented the last of the last straws. Before then, as you can see plainly on the chart above, the market was at many times willing to have given Ben Bernanke and his noisy QE’s the benefit of the doubt. And it might have provided him some useful cover if underneath the Fed Chairman had been willing to use that cover in order get the real money things right while that benefit was in effect.
He never did. He never even knew he needed to.
Early 2013 and repo showed instead that, no, it was QE and nothing else. The markets began to take note and adjust accordingly. Post-2013 inflation expectations as well as nominal Treasury yields, like growth expectations globally, have sunk and remained in the nether regions – even 2017’s globally synchronized growth barely registered as reflation in this context.
That’s the thing, though. The market’s inflation/growth skepticism has been proved to be correct many times over during the seven and a half years since that QE-filled February of 2013. No one’s getting fooled any longer down closer to the trenches.
Yet, here we are all over again in this “money printing” debacle of 2020. Right now, inflation expectations in these markets continue to cling to the lower ends of the historical ranges. Up from March lows, sure, but from extreme lows and the 2nd percentile to the 12th percentile isn’t quite the argument the Fed’s apologists think they are making.
Not with the trillions in LSAP’s in between.
And then there’s this…oh boy:
The Federal Reserve is determined to push inflation higher from levels it considers dangerously low. For that to happen, it must first convince everyone that prices will accelerate in the coming years.
Yep, and Bernanke’s folks had their last chance to do this in early 2013. And they blew it, big time, by focusing on QE’s presumed magical signaling effects instead of looking into the more relevant technical money problems that have plagued the world’s reserve currency system (eurodollar, not dollar) since August 2007. The entire global economy, especially its EM’s, not coincidentally has remained stuck – since 2013.
To convince anyone outside of the financial media and NYSE’s computerized trading platforms that prices will accelerate in coming years, in sharp contrast to these last seven and a half (thirteen, really), bigger QE’s like those in 2020 just won’t do it. They just won’t.
A key reason why is the utter nonsense paragraph which follows the one cited above:
One big problem is that the measures that bond traders and strategists rely on for longer-run inflation expectations can often give conflicting and confusing signals. No one can agree on how best to use or decipher them, with even the Fed seemingly reticent to narrow it down.
There has been nothing confusing about inflation expectations, no conflicting signals provided by them whatsoever. It’s only confusing if you still somehow believe the Federal Reserve is a central bank which prints money (rather than a domestic bank authority which pretends to) and that the central bank is somehow central to a global monetary system which proceeded for decades without one (and thereby came to create its own methods of money, including ultra-heavy reliance on repo therefore collateral for its ultimate backstop).
Before February 2013: we’ll give the Fed benefit of the doubt despite recurring problems because this is all new.
After February 2013: sorry, we’ve seen more than enough and we give up on this money printing nonsense largely because the real monetary problems always recur.
If everyone says the Fed printed a ton of money, and a ton of money printing always leads to inflation, then the distinct lack of inflation can only mean there was no money printed even if everyone said there had been. That’s the awesome beauty of science; it doesn’t work by consensus views.
Simple. Easy. Intuitive. Basic logic.
And, not for nothing, completely backed up by all the evidence. From the PCE Deflator to the CPI, there was “more” consumer price inflation in the pre-crisis era when the Fed did next to nothing (while the eurodollar system flipped into insane levels of overdrive) then there has been in the post-crisis (post-August 2007) period when mammoth, repeated QE’s and trillions in clearinghouse certificates (or laundromat tokens; however you wish to characterize bank reserves) are now the norm instead of the inflation that would be if money had been printed.
The only things that get changed are the size, duration, and targets of QE’s.
The Fed, by the way, now agrees with this same reading of history. That’s what all this average inflation targeting fuss is really about; the central bankers now admit that it hadn’t been transitory factors holding the inflationary breakout back for this many years. The bond market was right – though for reasons the central bank doesn’t yet quite understand (and therefore the ridiculous premise of the article quoted above).
A huge problem in 2020, no?
It only gets worse for poor Jay, Ben Bernanke’s unfortunate successor’s successor. They’re still at it with these QE’s and still wondering why the bond market just won’t go along with the “everyone says” narrative.
As I keep writing, these are not serious people – but these are serious times to have such unserious officials officially clueless about the most serious issues. It might as well still be February 2013.
Insult to injury, September 2020’s CPI report comes along today and what’s most noticeable is – again – the lack of inflation pressures anywhere in it. No, on the contrary, the numbers are more conspicuous for the major components going in the wrong direction.
Let’s not forget, too, that March and April were a long time ago – trillions in QE’s in between. Even with a lag, where’s the money printing pressure on consumer prices? They should at least be showing up here somewhere.
As with inflation expectations in the bond market, these are nowhere.
Core rates slowed, the CPI basket of services (excluding rent) most of all back down into the lowest percentiles. And then rental prices (primary residence) which have now decelerated by the most since 2008 with no sign of stopping.
The only pressures evident in the CPI data are the disinflationary ones. And we haven’t even gotten to sub-$40 WTI and it’s one buck front end contango.
Is this really surprising, though? In March, like 2012-13 (or 2010-11), the Fed did QE at the same time it did nothing about collateral (all the while, these idiots, taking note of the huge imbalances in collateral while not appreciating how these were things in collateral). The only real difference between February 2013 and September 2020 is the seven and a half years the media has spent ignoring what the bond market now takes as its well-founded skeptical baseline.
The financial media has printed many stories about money printing even though not a lick of effective money has actually been printed. The best part is, you don’t have to take my word for it. I can give you some reasons why, but even without them you can plainly see that “something” continues to be missing – growth, inflation, therefore…?