Morning Report: Inflation returns to the Fed’s target 2/19/16

Markets are lower this morning on no real news. Bonds and MBS are down.

Real Average weekly earnings increased 1.2% in January.

Inflation at the consumer level was flat month-over-month and up 0.3% YOY. Ex food and energy, it was up 2.2%, which is the highest level since June of 2012. This would indicate the Fed is actually getting there as far as its inflation target. That said, the Fed prefers to use the Personal Consumption Expenditure index, which is still below their target.

Chart: YOY inflation, ex-food and energy:

Good explanation of why the markets and the price of oil have become positively correlated. Old timers might remember back when an increasing oil price was a bad thing. Punch line: the banks have a lot of exposure to the energy patch and are lugging debt that made sense at $60 a barrel, but not at $30. That said, energy companies have issued $5 billion in equity secondary offerings this year, which is a surprise. The appetite is there, at least for some investors.

The thinking behind negative interest rates, explained. European economists give their take on it. Basically they work well in smaller. open economies as a lever to manipulate foreign exchange rates, but they aren’t all that effective for larger economies which are trying to boost inflation and growth. In other words, they might work for Denmark, but probably won’t do much good here. Japan recently went negative, so that will be a good test of that theory.

Housing affordability is getting a little better as rates fall. Unsurprisingly, the Rust Belt and the Northeast are the most affordable, while California remains the worst. Note San Francisco is proposing transfer taxes for luxury properties in order to address affordability. Between rich tech workers and Chinese investors, property prices in San Francisco are sky-high.

There is legislation afoot to eliminate the caps on VA loans, which will make them much more popular in high cost areas. Basically it will become a no money down jumbo. It has passed the House, and the prospects are good in the Senate and the WH.

65 Responses

  1. Like

  2. I think I am coming to agree with this:


    • I’m all for dueling, but whose going to do it in our modern era? You have to culturally accept that shooting at someone while they shoot at you is a good resolution to disagreements and slander, and I don’t think it will happen. Also worth nothing that even if you were successful in a duel it was often a career killer. Just ask Aaron Burr!


  3. Left vs left fights over overly optimistic multiplier assumptions are hilarious.

    This is a useful compendium of erroneous economic forecasting by the Clinton & Obama administrations.


    • It’s fun to read DKOS for the absolute faith in any number of multipliers.

      The PL as well.


      • And it is so idiotic. Japan has spent 2.2x their GDP on Keynsian pump priming, make-work projects and have had zero growth to show for it and are now in negative interest rate territory.

        Politicians love Keynsian spending because it gives them an economic fig leaf to do what they love to do best: spend money. Liberal economists go with it because they believe in big government to begin with and approve of the redistribution aspect of it.


        • Don’t forget that there are mainstream political philosophies, including Republicanism that believe that economies can and should be managed.


        • There are a couple of problems with Keynsian spending (most embodied in the term make-work). Let’s say a number of areas of government investment will boost an economy. Let us also say, as I think is pretty clear, we have no idea what those are. Or, we do know what they are, but the both how and how much are very critical factors to avoid getting no or negative results.

          Further, let’s say that in addition to these various vectors where government spending will result in some long term return to the economy, there are a number of areas that are favored by individual politicians and groups that show no evidence of generally befitting the economy. And they are competing for money with these few areas where there will be benefits, in addition to the problems of identifying those areas and then successfully managing them. Just as there are a lot of taxes that can be cut, some of which will be more beneficial to the economy than others, there are many, many things the government can spend money on. Research, for example. Committees to implement deregulation of antiquated regulations that are holding companies back. The building of giant empty cities to impress foreigners. Just spending money has no guaranteed return, and a lot of it might just as well be thrown down a hole (Solyndra?) … other moneys may be beneficial, either in the short term or the long term, such as investment in useful infrastructure. Yet even in those areas, there is competition for the money for reasons other than benefitting the long term economy, such as securing political power or paying back important friends. Keynsian pump priming is the sort of thing that works in an idealized system where everyone involved is a rational economic actor with a long term view . . . in other words, it is Utopian.



      The multiplier for tax cuts is about 3. The multiplier for spending is about zero.

      Makes sense, really. When you cut taxes, resources are allocated according to the preferences of the individual (i.e. a market). When you do Keynsian spending, resources are allocated based on political considerations – who faces a tough re-election contest, which party controls Congress and the Presidency, etc. Resources aren’t allocated by any sort of market driven logic, so it is inevitable that they have little to no effect.


      • I guess that explains the explosion of growth in the aughts after the stagnation of the 90s. Oh wait…

        I know. Empiricists are such a pain in the ass.



        • You agree then that the economy cannot in any way be managed, correct?


        • The economy can 100% be managed. Managed right into the toilet. Governments have done it since villages were large enough to have any level of trade that could be called an economy.


        • Kev, I think total govt. management of the economy is a proven disaster – e.g., the Soviet Union. I think partial govt. management works about as well as the managers being able to keep up with the unmanaged sector – e.g., Japan.

          I think that welfare state capitalism/Swedish school works fairly well when everything that can be competitive is left private – this was Myrdahl’s original theory. Israel was born into a siege mentality in the late 40s that led to immediate state dominance of the economy, which worked when the population was motivated by the siege state mentality. But as Israel came off a total war footing, private enterprise capitalism grew, and now dominates, so the economy has thrived, which I think is a direct result of the withdrawal of the State.

          In a developed economy with a representative government, the political entities are by necessity big players. Roads, schools, libraries, public safety and public health at the state and local level; defense, interstate highways and waterways, and a host of other activities are countenanced or favored in even the least intrusive
          national entities.

          As for the traditional Keynesian dimension, I think Brent and JNC have pointed out that it is one thing to have some countercyclicals working automatically around the edges, dampening boom and bust, but quite another to have perpetual stimulus. And because this nation has generally been in serious deficit for most years since RWR was POTUS – the exception being a short time during the WJC Admin – it has been in perpetual stimulus for a generation. This means all talk of more stimulus is facially ridiculous. The multiplier only works to advantage in a closed loop, but if much of consumer spending winds up in east Asia there is virtually no local multiplier from US deficit spending.

          I do distinguish deficit as stimulus by multiplier effect from countercyclical spending to dampen a bust. In other words, I do think it is OK to time big road and bridge and port maintenance projects in a recession, and pull back on same in a boom. This has some marginal damping effect which is useful. And in the fifties it probably had a measurable multiplier effect, within the boundaries of the USA. I wouldn’t count on a multiplier today.


        • The growth in the 90s was the result of (a) a stock market bubble, and (b) a once-in-a-generation bump in productivity due to the personal computer evolving from a glorified typewriter to an indispensible tool on everyone’s desk and the emergence of the Internet. It was in no way representative of a “normal economy.”

          W took office after the stock market bubble burst, just like obama took over after the real estate bubble burst.

          W’s unemployment rate was just shy of Clinton’s, and way better than obama’s. obama’s unemployment rate looks good only if you ignore the labor force participation rate.

          I would take W’s performance over Japan’s in a heartbeat.


        • It would say it’s not a once in a lifetime thing (although I will *always* argue that the current occupant of the Oval office is only marginally relevant to the economy; it was not a Clinton boom, and where it was maybe it would have been better if it had not been (don’t worry about that balloon payment! it’s fair housing! the government wants us to do it! now, quick, sell that mortgage before we get stuck with it).

          Not once in a lifetime because the technology revolution is far from over. 3D Printing will revolutionize manufacturing and vertical AI is going to blow up productivity once again in the not too distant future. Nanotechnology will increase manufacturing efficiencies and energy-usage efficiencies by orders of magnitude, probably within the next 25 years. During this period there will be years, maybe decades, where the infrastructure is moving into place and these technologies and others seem destined to fail or too problematic to result in any kind of productivity or efficiency boom, until . . . boom. Another huge jump.

          And 90% of dedicated ideologues and partisans will argue that it was either the current president (if of their ideological bent) or the result of the previous president who was of their ideological bent laying the groundwork, or the opposition congress or the result of something the Evil Other Party tried to outlaw. Such is the nature of the beast.


        • Fun arguing the counter-factual, isn’t it, Brent?

          I happen to have been around in the 80s and 90s. Desktop computers were a reality in the 80s and were far from a glorified typewriter. Remember Lotus 123? How about Word Perfect? I was a fan of WingZ (a Mac spreadsheet). The PC revolution pre-dated the Clinton era. But, it does allow you to discount anything that conflicts with your world view.

          Liked by 1 person

        • FB:

          I’m not sure I understand your point. Are you saying that the differences in economic results between the 90’s and early 2000’s empirically demonstrates that high taxes and having government direct where resources go produces better economic results than lower taxes and letting people spend their own money?


        • I would tend to argue that the difference in strategies is negligible. The important things tend to be, IMHO, property rights (people have to be able to own property and a system has to exist to enforce those rights) and the ability to accumulate capital. How hard it is to easily start a legal business and run it is another critical factor (countries that eschew capitalism and make it an expensive, bribe-filled affair to start and run a business tend to have horrible economies, irrespective of tax rates). The ability to patent legitimate innovations and protect those patents is important, and copyright intellectual material and have those copyrights enforced . . . also critical. A reliable banking system, easy ways to transfer money and access credit, the ability to aciculate capital and real property in your name and use it as collateral for loans . . . those tend to be the things missing in the 3rd world.


        • KW:

          I would tend to argue that the difference in strategies is negligible.

          The study Brent linked to suggests quite the opposite.

          The important things tend to be, IMHO, property rights (people have to be able to own property and a system has to exist to enforce those rights) and the ability to accumulate capital.

          It seems odd that you would say that the difference in strategies is negligible while highlighting these things as important to good economic results, since one of the strategies is explicitly a direct diminution of those rights/abilities that you highlight as being important to success.


        • I’m not sure the study suggests the opposite per se, but I may not be reading it right. I would suggest that higher taxes often don’t diminish economic activity but push it underground (into under the table payments or the black market), which it’s not clear to me how they compensate for. But I’m not great at reading academic papers, I grant you.

          “since one of the strategies is explicitly a direct diminution of those rights/abilities that you highlight as being important to success.”

          Could you amplify this point?


        • KW:

          Could you amplify this point?

          Taxation represents a diminution of both property rights and the ability to accumulate capital. Every dollar that the government takes from you is a dollar that a) you no longer have a right to and b) cannot be accumulated by you. As the tax rate climbs, so too does the degree of both a) and b). A system with a 100% income, property, and wealth tax would, by definition, be a system in which property rights were not protected at all and no one could accumulate capital.


        • Ah, I got you. Without getting to deep into the weeds right now, it comes down to a matter of (a) how much is taxed (10% is much less a burden than 50%), how it is taxed (do the incentives drive capital away? is it a consumption tax or an income tax or a VAT?) and what are the taxes spent on? Infrastructure, research, common defense, courts to enforce ownership rights, or investments in green technology and paying people not to work? And so on. Arguably, I think it’s best for the economy that people keep the money they earn and decide how it should be disposed of. I also prefer incentives that encourage large corporations to repatriate their foreign revenues and lower taxes while removing methods of sheltering revenues outside the domestic economy. But I would still argue the ability (which some money has to pay for) to defend your rights to property, patents, copyright, and capital is a critical factor, and an economy with almost no taxes but also without reliably banking, methods of transferring capital, access to credit, courts in which to adjudicate patent and copyright disputes, etc will be a 3rd world economy. An economy with all those things and confiscatory taxation will be a 1st world economy performing sub-optimally thanks to over-exuberant taxation and the incentives that structure creates.

          That being said, what would be better from a strictly economic sense? Cutting taxes or reducing regulatory burden? I tend to suspect it would be the reduction of regulatory burden. Alas, we tend to see an increase in both in 1st world economies, so it’s difficult to abstract one from the other.


        • KW:

          Without getting to deep into the weeds right now, it comes down to a matter of (a) how much is taxed (10% is much less a burden than 50%), how it is taxed (do the incentives drive capital away? is it a consumption tax or an income tax or a VAT?) and what are the taxes spent on?

          As a pure economic matter, I don’t think it does matter. Lower taxes are necessarily better economically than higher taxes. 5% is better than 10%, just as 10% is better than 50%. It is always better to have individuals spending their own money on things of their own choosing that to have government confiscate it and spend it on things of its own choosing.

          As a practical matter, of course, the government is necessary to perform the function of protecting property rights, and therefore a certain amount of revenue raising is required to enable it to perform this function. Property rights are no better protected in a community characterized by anarchy than in a community characterized by 100% taxation rates. So it could reasonably be argued that a certain amount of taxation is necessary in order to maximize the protection of property rights. But when we are talking about the multiplier effect of tax cuts vs government spending, we are not talking about the taxation/spending level that maximizes property rights protection. We are talking about the government re-directing resources into areas of economic activity of its own choosing rather than maximizing the ability of individuals to do so. And it is in that context that your “negligible” remark strikes me as odd.


        • KW:

          I would suggest that higher taxes often don’t diminish economic activity but push it underground (into under the table payments or the black market)

          That seems to me a bit like arguing that back alley muggings don’t increase the crime rate because they result in people avoiding back alleys.


        • … which, if it results in fewer muggings, has reduced crime!

          It’s also reduced back-alley usage, but that’s another issue.


        • Man, if I would have just put the money I spent on my TRS-80 Color Computer and software and peripherals into Microsoft when it went public, I wouldn’t have had to work a day past they year 2000.

          Pre-desktop computing, there was a great deal of money in time sharing on mainframes. Alas, as with the buggy whip makers of old, onces the desktop computing revolution really took hold, the time sharing business went away.


        • Thought that was how Perot made it big, he sold mainframes with the idea that the buyer could rent them out at night to other users


        • It was, and he did. Both at IBM and with Perot Data Systems. And that’s exactly what happened. Any city of any size had at least a handful of folks renting out mainframe time, locally or to national or even international clients. They operated a lot like any large service organization (or advertising agency), pitching companies locally and nationally, then providing services for as long as the contract lasted. A friend of my Dad’s had a timeshare service and they struggled most of the time, but they did a lot of financial processing for American Express and that kept them afloat. They also rented a lot of time out to banks, who needed the computing power for audits and such. Now days, you have more computing power on an iPhone. Not to mention, a great deal more physical memory. I remember going into the refrigerated room to see the hard drives. They were in the megabyte range (100 mb, I think, maybe 500 mb) and the size of a clothes washer.


        • The whole reason Perot left IBM:

          In January 1962, Perot had already fulfilled his entire annual sales quota because of a recent change in IBM’s commission structure. Not satisfied with the administrative job then offered him by IBM, he recognized an unmet need among IBM’s many computer customers. Most companies had few knowledgeable personnel to operate their new computer equipment. Perot wanted to offer skilled electronic data processing management services to these companies. He presented his ideas to IBM executives, but they were not interested.

          Perot left the company and, on June 27, 1962–his 32nd birthday–incorporated Electronic Data Systems in Dallas. EDS developed a business concept later termed “facilities management.” Companies would concentrate their energies on what they did best, leaving the computing and data processing tasks to EDS, who could do them more efficiently and economically.

          What that doesn’t make clear is that, having filled his “sales quota” for the year, IBM decided they wouldn’t pay him any more money. He was expected to continue to sell for the remaining 11 months of the year, but would not see one penny in commission for his work. It was a change brought about because the top sales people had been earning more than the CEO and other executives. So to save a few hundred thousand IBM ultimately lost millions due to Perot’s defection. And that is what class envy and bureaucracy combined get you!


        • Happens over and over again. Happened to me in a small company about 4 years ago.


        • The early part of the S curve did start in the 80s. The meat of the S curve was in the early-to-mid 90s, as anyone who bought Dell or Microsoft back then could have told you. The Internet was also a productivity enhancing marvel as well.


        • “The Internet was also a productivity enhancing marvel as well.”

          “Yes,” he agreed, while taking a break from Facebook to read a political blog.

          Liked by 1 person

  4. OT: Wife divorces man for leaving dishes by the sink:

    First of all, I hate stuff like this because it doesn’t even explore the likelihood that the lady already had her new man picked out (just sayin’). Secondly, I don’t like the nature of the advice, which is all about how a responsible dude should be responsible to appease the woman.

    A responsible dude should be responsible because he should be. You can put your own damned dishes in the dishwasher. You should do that. Because you’re a grown up. Not because some woman doesn’t like it, and will ultimately do you a huge favor and vacate your life because in the same way you’re too lazy to put the dishes in the dishwasher she’s too lazy to find a way to communicate clearly . . . or be honest about how she’s screwing her tennis instructor and you’re becoming an impediment to her last gasp and feeling young and sexy. The article, of course, skips that part but reality tells us that there are usually other incentives involved in such “I’m divorcing you because you snore” cases.

    But I remember my wife often saying how exhausting it was for her to have to tell me what to do all the time.

    Why I hate stuff like this. Who died and made her queen? Either do it yourself or negotiate a workable distribution of tasks that need to be done or do it yourself. Or find a frickin’ solution, like only washing your own glasses and leaving his to rot.

    But she didn’t want to be my mother; she wanted to be my partner, and she wanted me to apply all of my intelligence and learning capabilities to the logistics of managing our lives and household.

    So she divorced you over the dishes, and you’re making excuses for her.

    That doesn’t seem like the kind of thing too big to do for the person who sacrifices daily for me.

    I’d be interested in knowing what those sacrifices were, given understanding them would be critical to knowing how much of a dick he was actually being, or if he was just being a passive-agressive pussy because, in fact, her sacrifices weren’t really sacrifices for him but just things she did because she felt compelled to them or thought they’d be good ideas irrespective of how he actually felt about them, or if he even cared about them.

    The wife doesn’t want to divorce her husband because he leaves used drinking glasses by the sink.

    She wants to divorce him because she feels like he doesn’t respect or appreciate her, which suggests he doesn’t love her, and she can’t count on him to be her lifelong partner. She can’t trust him. She can’t be safe with him. Thus, she must leave and find a new situation in which she can feel content and secure.

    I reiterate. The woman divorcing him in that situation is doing him a favor. Never does the author discuss how her similar complete inflexibility on the issue is borderline psychotic, and reading all of that into a glass in the sink is a recipe for her lifelong dissatisfaction in almost every situation.

    In conclusion, do whatever your wife wants and have no expectations of her and everything will be great! Also, any emotional outburst she has is legitimate and any feelings you have on the issue are wrong, so stop arguing and obey, as obedience is the only way to prove your love.

    That being said (always have to make this clear) a mature man cleans up after himself.


    • Like

      • I’m just sayin’. If someone wants to divorce you because you don’t put your dishes in the washer promptly because they read all sorts of other shit into it, they are doing you a favor. 😉

        If you can’t manage to put your dishes in the washer in a prompt and timely manner, or because you are cool with a sink full of two weeks full of dishes, you need to get your shit straightened out. And not because the matriarch will disapprove, but because you’re a grown ass man and need to act like one, irrespective of any rationalized approval-seeking (not a mentally healthy behavior, btw) a recently divorced blogger (supposedly) is arguing that you should be doing because Mother Issues.



        • There are other things going on in that marriage, however it’s been my experience that how well a house is kept is foundational to a woman’s identity and often causes intense perceptions of responsibility imbalance between her and her husband. Men just do not need to exude the perception of a tidy, well run house.


        • Depends on the guy, I suppose. That being said, as for what else was going on in that marriage, I expect the wife already had a brand new boyfriend and the old husband had become an impediment to that awesome new relationship with Mr. Right. Just a guess. And the dude writing the blog post is a clueless rube who didn’t even both to check old credit card statements and cell phone records, but thought: “Gee, I was really a cad for leaving my dishes in the sink instead of just putting them up.”

          Nesting is definitely important for most ladies. I required a tidy and well-run house, but the definition of that can definitely vary between people. If the rooms are clean and the floors vacuumed and the remotes in their cubby and everything picked up, it makes absolutely no difference to me if the two flower print pillows are equally distributed amongst the other dozen throw pillows on the couch in an aesthetically pleasing array. Which I expect would be the grounds for my wife divorcing me:

          “I told him again and again, the flower pillows should be arranged so there is one both on the front and right, and the brown one is behind the blue one and THEN THE GODDAMMED FLOWER PILLOW!!”

          “May it please the court, it is clear what an unloving, heartless bastidge the defendant is. Please grant the divorce immediate and award Mrs. Willis all moneys and property.”


  5. This Harry Reid speech that’s been making the rounds is a font of hypocrisy in hindsight. In addition to saying that Presidential nominees aren’t entitled to a vote in the Senate, there’s also this:

    “Well, Mr. President, we never said we would break the rules to change the rules. To change the rules in the Senate can’t be done by a simple majority. It can only be done if there is extended debate by 67 votes. So I do not at all say that the statements made by the Republican leader were wrong about our wanting votes and we were disturbed that there are no votes, but we never, ever suggested that rules should be broken.”


  6. CIA has dedicated program to recruit transgenders.

    If you are thinking that there is some transgender terrorist cell that the CIA is trying to infiltrate, you’d be wrong.

    CIA Director John Brennan said diversity and inclusion are “at the heart” of what the intelligence service is “charged to do.”

    Nonsense. Is there a single area of the US government that Obama has not done serious damage to?


  7. The same people whining over this were the ones claiming us Baggers were shouting “Nigger” at Elijah Cummings before the Obamacare vote.

    Fuck them, Ihope it tars then for life.


  8. Is this a big deal in Limeyland?


    • McWing:

      Is this a big deal in Limeyland?

      The fact that the UK might leave the Eurozone, yes. The fact that Boris Johnson is backing it, probably not so much.


  9. Briefly discussed my love of Reagan at the PL. As usual, the enlightened and intellectual liberal intelligentsia there demonstrated their immunity to both facts and context. I totally trust them with running every aspect of my life for the greater good. Why would I ever vote for anybody else? Wait, I mean, I’m always going to vote for anybody else.


  10. Like

    • I bet the Democrats are stoked. Because they keep telling us how Trump will destroy the Republican party and there is no way he would win. If I thought there was a chance Tennessee wouldn’t be a solid red, I might vote for him. Might vote for him anyway, if his VP is Oprah.


    • The big question for the D is whether he is a plurality champ or a real winner. We will see once the establishment coalesces around one candidate.

      I am still close enough to the Paul Singer crowd to know there is a shitload of negative advertising waiting to come out on Trump’s business dealings.


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