That Cagey Janet Yellen


Janet Yellen didn’t convince a lot of people this week with her argument that inflation could rise and she must remain vigilant. People haven’t seen inflation in the numbers – you now, other than in stocks, health care and housing, but since when have those counted – so, their recency bias tells them there’s no inflation and it’s not coming. They’re wrong and Yellen knows it, but she can’t really say why. Why can’t she? Maybe she knows something. BAUM!BAUM!BAUM! Shhh, I think she knows that we’re about to see oil jump much higher even if the trader’s narrative doesn’t agree.

 

Transitory, Shmansitory

Janey Yellen has mentioned “transitory” issues as subduing inflation on multiple occasions. In the past few years she was generally referring to the fall in the price of energy. This week she mentioned cheaper cell phone bills – thanks Sprint (S) and T-Mobile – and a small decrease in prescription drug prices (stupid Obamacare). She really could have refocused on oil again though. Take a look at these charts from dshort.com (if you’re an advisor you know who that is, if you’re not, welcome to the club):

Inflation YoY May 2017

 

Do you notice that communication costs did in fact fall for the past year? Well, if you didn’t, then you need to shop for a new plan. My son just got a job at an AT&T (T) store in Oak Creek, WI, so he can help you out. And, the rate of inflation for medical care has trended down too lately (thanks Obama). For some reasons clothes got cheaper. Maybe all those new clothes with tears are actually old clothes. And now, look at energy. The rate of inflation really tailed off. That’s a pretty big deal. Here’s the other chart:

Inflation MoM May 2017

Ok, take a look at this closely. Clothes, energy and the very famous “other” member of the band all got a lot cheaper month over month. See the top chart, energy is 8% of the CPI. But wait, there’s more. Energy influences the cost of other goods and services, as well as, other goods and services, so it’s impact is really deeper on CPI. Any farmer can tell you that food gets more expensive when oil and gas are more expensive. Transportation costs go up for going to work and shipping gets more expensive. Neither food consumption nor transportation can be reduced enough to completely offset the rise in oil prices. Sure, there’s bumpers in the CPI formula, but when oil prices have gone up in the past, inflation has gone up almost across the board. That equation will change someday as electric vehicles and other technology makes oil less important, but that day is at least a decade away and probably around two decades.

Think of the energy conundrum from the perspective of “Yellen and the Feds” – as I call the rock stars at the Federal Reserve. If energy costs were to say, go up, in say a reversion to the mean, then what would happen? Well (not a play on oil words), that would mean some pretty inflationary inflation numbers.

Of course, we don’t really know what the oil price should be or could be, nobody ever really does because it is a manipulated market, but let’s say it goes to $70 per barrel by next summer. From the current $47 per barrel, which is barely break even for a lot of the industry, then that would be a pretty big jump on 8% of the index. I don’t bother talking about natural gas here, but let’s just presume that gets more expsnive about as much as oil does because that’s what usually happens (there’s actually a strong argument it would go up more due to exports, but I’ll save that for later).

So, what if Janet Yellen knew that oil might get more expensive? Could she know such a thing? She’s pretty connected. I have a hunch what could be coming and I’ll talk about that again all of next week, but let’s just say I think we should expect at least one Saudi surprise and probably two. 

Bottom line, is even if Chair Yellen doesn’t know that something is coming to raise oil prices, she has to be wary of it because it usually does happen. Having a stronger currency if it does happen will be pretty important and that’s something these interest rate increases could help.

The Next Recessions

Richard Fisher, an ex-member of the Feds, not to be confused with Stanley Fischer who is still in the band and not related, was on TV today talking about how the Fed raising rates had to do with having firepower to fight the next recession. I think that’s plausible. We do have to remember that Richard Fisher likes higher interest rates in general and is a pretty tough guy though. 

My thought is this. If we’re afraid of the next recession, why not keep rates lower? We can always do QE Infinity (great album). I actually think we’re lining up for “helicopter money” because what is really going on is just more finessing the big problem which is the obligations coming due globally from aging demographics. 

Minneapolis Fed President Neel Kashkari dissented on raising interest rates. He talks about it here in a blog on Medium titled “Why I Dissented Again” which I found to be a pretty bland title. The short story, Kashkari thinks the economy is sending mixed signals – story of his dating life no doubt too – so wanted to err on the side of too much inflation, not too little. Here’s what he said: “For me, deciding whether to raise rates or hold steady came down to a tension between faith and data.” Tell me that doesn’t sound like he’s trying to read a girl’s signals at a dull party.”

There’s more from Kashkari though. He’s talked quite a bit about how aging demographics, technological change and global debt have impacted the global economy. Boy, that sounds an awful lot like the arguments I keep making about “slow growth forever.” Hmmm.

Understanding The “Slow Growth Forever” Global Economy

Investing In The “Slow Growth Forever” Global Economy

We do need to keep our eye out for the next recession. Why? Because it’s coming. Who knows when? I think within a year we get a shallow recession, but my favorite indicators are only flashing weak, so I could be wrong.

It is interesting to note that a new Fed Chair will probably be named next year and I’ve already said I think Kashkari is a strong contender Maybe his opposition to a rate hike has to do with showing support for the man who will hire the next Fed Chief. Oh, it could really be a soap opera. Regardless, Kashkari seems to get what Larry Summers is talking about with a structurally slow for a very, very long time economy, i.e. slow growth forever, so I think he’d be a legitimate choice for Fed Chair when it comes up. I think he’ll be willing to do what it takes to make sure we don’t end up in the depression that we narrowly avoided once.

There’s one other thing to think about. Maybe Janet isn’t thinking about oil or inflation or employment. Maybe she is thinking about something else altogether. Maybe about the long-term health of the dollar which is the free ride of the planet for as long as we can remain reserve currency (decades more in my opinion). Or maybe, she’s thinking something more sinister. Something politically motivated. Nahhh, she’s a nice little old lady, she’s just doing what she thinks is best. Maybe those things are the same.

Alright, I’ve had enough for one week. Next week I have NINE, count’em 9, articles ready to edit and publish. I hope you look forward to a lot of talk about energy because it’s the topic of the week next week.

I’m going to watch the Milwaukee Beavers baseball club tonight. They have a food truck coming.

Kirk out