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Trust Masters, not Models

June 25, 2020 4 comments

Normally, when I write about markets, I try to point at models but there is a lot of guesswork and gut-work in analysis. When times are sort of normal, then models can be a big part of what drives your thinking. But times have not been ‘normal’ for a very long time, and this is part of what drives big policy errors (and big forecasting errors): if you are out of the ‘normal’ range, then to make a forecast or comment usefully on what is going on you need to have a good feel for what the model is actually trying to capture. You need to know where the model goes wrong.

When I was a rates options trader – stop me if I’ve told this story before – I found that I preferred to use a simple Black-Scholes pricing model instead of some fancy recombining-trinomial-tree-with-heteroskedastic-volatility-model. That was because even though Black Scholes doesn’t match up super well with reality, I at least had a good feel for where it fell short. For example, the whole reason we have a volatility smile is because real-world returns have fat tails, but pricing models like Black Scholes are based on the normal distribution. When the smile flattens, it means returns are becoming more like they’re being drawn from a normal distribution; when it steepens it means that the tails are becoming fatter. So that’s easy to understand.

If you understand why an option model works, then it’s easier to think about how to price something esoteric like an option on an inflation swap (which can trade at a negative rate, but actually isn’t a rates product at all but rather is a way of trading a forward price), and not mess it up. But if you just apply and try to calibrate a bad model – especially if it’s really complicated – then you get potentially really bad outcomes. And that is, of course, exactly where we are today.

We haven’t been ‘normal’, I guess, for a couple of decades. Central banks, and in particular the Federal Reserve, have dealt in the markets with a heavier and heavier hand. Nowadays, the Fed not only has expanded its balance sheet by trillions in a very short period of time, but it has expanded the range of markets it is involved in from Treasuries to mortgages to ETFs and now individual corporate bonds. And, since the whole point of this is because the Fed wants to make sure the stock market stays elevated (they are preternaturally terrified at the notion of a wealth effect from a market crash, even though historically the wealth effect has been surprisingly small) I suspect it is only a matter of time before they directly intervene in equity markets.[1] C’est la vie. There is no normal any more.

But at least the ‘normal’ we have had over the last decade was just modestly outside of the prior normal. Things didn’t work right according to the ‘traditional’ way of thinking about things; momentum became ascendant in a way we’ve never seen before and value almost irrelevant. We are now, though, working on a whole different part of the number line. This means that economists will continue to be surprised at almost everything they see, and it means that any model you look at needs to be informed by a good intuition about how the hell it works.

So, for example, let’s consider the money supply. Over the last 13 weeks, M2 is up at a 63% annualized rate. With two weeks left in the quarter, it looks like we will end up with something like a 10.25%-10.50% growth in the money supply for the quarter. The Q2 average money supply, compared to Q1 (important in looking at the MV=PQ equation), is going to be about 13.85% higher. That’s not annualized! Remember, the old record in M2 growth for a year was a bit above 13%, in 1976.

The current NY Fed Nowcast for 2nd Quarter GDP – keeping in mind that no one has any idea, this is as good a guess as any – is -19.03%. I really like the .03 part. That’s sporty. That would mean q/q growth of -4.75%.

If we want the price deflator to come in around 1.75% (+0.44% q/q), which is where it was for the year ended in Q1, then that means money velocity needs to fall about 16% for the quarter. (1-4.75%)*(1+0.44%)/(1+13.85%)-1 = -15.97%. If money velocity falls less, and that GDP estimate is correct, then inflation comes in higher. If money velocity falls more, then inflation comes in lower. If GDP growth is actually better than -19% annualized, then inflation is lower; if GDP is worse, then inflation is higher. We don’t need to worry much about the M2 numbers themselves, as they’re almost baked in the cake at this point.

The biggest amount that money velocity has ever fallen q/q is about 5%. But clearly, these are different times! We’ve also never seen a 19% decline in growth.

Weirdly, our model has M2 money velocity for Q2 at 1.159, which would be a 15.6% decline in money velocity. Let me stress that that is a total coincidence, and I put almost zero weight on that point estimate. Contributing to that sharp decline, in our model, is the small decline in interest rates from Q1, the increase in the non-M1 part of M2, the small increase in global negative-yielding debt, and (most importantly) a large increase in precautionary demand for cash balances due to economic uncertainty. (This is why it’s hard to get velocity to stay down at this level. The current low levels depend on low interest rates, which will probably persist, but also on dramatic precautionary savings, which are unlikely to). Small changes in money velocity will have big effects on inflation: if our model estimate for velocity was right, we’d see annualized inflation for Q2 at 4.3% or so. Here’s how confident I am in our model: for Q3, it is seeing unchanged velocity (approximately), which with money trends and the GDP Nowcast figures from the NY Fed would imply that y/y inflation would rise to 6.22%, about 17.5% annualized for the quarter. Not going to happen.

Here’s where knowing a bit about the underlying process and assumptions really matters. Velocity is effectively a plug number, in that bureaucrats are good at measuring money and pretty good at measuring GDP and prices, but really bad at measuring velocity directly. So velocity is solved for. And our model (along with every other model, probably) treats the response of money velocity to the input variables as more or less instantaneous. For small changes in these variables – movements in money growth from 4% to 6%, or GDP from 2% to 0% – the assumption about instantaneity is pretty irrelevant. The economy adjusts prices easily to small changes in conditions. But that’s not true at all for big changes. On the available evidence, many prices (if not most) accelerated a bit in Q2, which surprised almost everyone including us. But no matter what the model says, prices are not going to drop 5% in a quarter, or rise 5% in a quarter, for the entire consumption basket. Price changes take time – heck, rents don’t change every month, and it takes time to rotate through the sample. Also, manufacturers don’t tend to make large changes in prices overnight, preferring to drip it in and see consumer response. But here’s the point: the model doesn’t know this. So I suspect we will see money velocity this quarter around 1.14-1.17…not because I believe our model but because I think prices will accelerate by a little bit and I think the real uncertainty surrounds the forecast of GDP. Over time, velocity and inflation will converge with our model, but it will take time.

For what it’s worth, I think that GDP growth will be a little lower than the NY Fed thinks, for a different model reason: the model assumes that changes in various economic data can be mapped to changes in GDP. But that assumes a fairly stable price level…what they’re really mapping this data onto is the nominal price level, and assuming that the price level doesn’t change enough to matter. So I think some of the dollar improvement in durable goods sales, for example, reflects rising prices and not growth, which would be manifested in a slightly lower GDP change and a slightly higher GDP deflator change.

What does this mean and why does it matter?

For one thing…and you already knew this…models are currently trash. They mean almost nothing by themselves. You should ignore it all. I give very little credence to the NY Fed’s forecast. I am pretty sure Q2 GDP growth will have a minus sign, but I couldn’t tell you between -15% and -25% and neither can they. Which is why the -19 POINT OH-THREE is so sporty. But by the same token, you should listen more to the model-builder, and to people who understand what’s going on behind the models, and to people who are taking measurements directly rather than taking them from models. Because this is going back to the art of forecasting, and away from the science. We are over-quanted in this world, and we are over-committed to models, and we are overconfident in models, and we are over-reliant on models. They have a place, just as the autopilot has a place when conditions are placid. When things get rough, you want a real pilot holding the controls.[2]

There used to be a couple of guys in Boston who were auto mechanics and had a radio show. People would call up and describe the noises their cars made, and the guys would ask whether it made the noise only turning left, or both directions, and whether it got worse when it was humid, and other things that sounded crazy to you and me. And then they would diagnose the problem, sight-unseen. Those are the people you want to take your car to. They’re the ones who understand how it really works, and they don’t need to hook your car up to a computer to tell you what the problem is. I took my car to them, and they really were geniuses at it. So look for those people in market space: the ones who can tell by the sound of the squeal what is really going on under the hood. They won’t always be right, but they will have the best guesses…especially when something unusual happens.


[1] Ironically, I think that something else they are considering would have a much bigger effect on equity markets than if they directly bought equities, but I don’t want to talk about that in this space because it also has big implications for inflation-related markets and would create some really delicious relative value trades that I don’t want to discuss here.

[2] Although I didn’t think I’d remark on this in today’s comment: this is also why the Trump Administration’s move today to loosen the Volcker Rule to let banks take more risks with their capital is very timely. There is a lot of bumpy flight ahead of us and we should want seasoned traders making the markets with actual capital behind them, not robots looking to scalp an eighth.

Categories: Analogy, Investing, Trading

The Flip Side of Financialization of Commodities

Recently, a paper by Ilia Bouchouev (“From risk bearing to propheteering”) was published that had some very thought-provoking analysis. The paper traced the development of the use of futures and concluded that while futures markets in the past (specifically, he was considering energy markets but notes the idea started with agricultural commodities) tended towards backwardation – in which contracts for distant delivery dates trade at lower prices than those for nearer delivery dates – this is no longer as true. While others have noticed that futures markets do not seem to provide as much ‘roll return’ as in the past, Mr. Bouchouev suggested that this is not a random occurrence but rather a consequence of financialization. (My discussion of his fairly brief paper will not really do it justice – so go and read the original from the Journal of Quantitative Finance here).

Let me first take a step backward and explain why commodities markets tend towards backwardation, at least in theory. The idea is that a producer of a commodity, such as a farmer growing corn, has an affirmative need to hedge his future production to ensure that his realized product price adequately compensates him for producing the commodity in the first place. If it costs a farmer $3 per bushel to grow corn, and he expects to sell it for $5 per bushel, then he will plant a crop. But if prices subsequently fall to $2 per bushel, he has lost money. Accordingly, it behooves him when planting to hedge against a decline in corn prices by selling futures, locking in his margin. The farmer is willing to do this at a price that is lower than his true expectation, and possibly lower than the current spot price (although, technical note: Keynes’ ‘Theory of Normal Backwardation’ refers to the difference between his expected forward price and the price at which he is willing to sell futures, so that futures prices are expected to be downwardly biased forecasts of prices in the future, and not that they are expected to be actually lower than spot ‘normally’). He is willing to do this in order to induce speculators to take the other side of the trade; they will do so because they expect, on average, to realize a gain by buying futures and selling in the future spot market at a higher price.

Unfortunately, no one has ever been able to convincingly prove normal backwardation for individual commodities, because there is no way to get into the collective mind of market participants to know what they really expect the spot price to be in the future. Some evidence has been found (Till 2000) that a risk premium may exist for difficult-to-store commodities (agricultural commodities, for example), where we may expect producers to be the most interested in locking in an appropriate profit, but on the whole the evidence has been somewhat weak that futures are biased estimators of forward prices. In my view, that’s at least partly because the consumer of the product (say, Nabisco) also has a reason to hedge their future purchases of the good, so it isn’t a one-sided affair. That being said, owners of long futures positions have several other sources of return that are significant and persistent,[1] and so commodity futures indices over a long period of time have had returns and risks that are similar to those found in equity indices but deriving from very different sources. As a consequence, since the mid-2000s institutional investment into commodity indices has been significant compared to the prior level of interest, even as actual commodity returns have disappointed over the last 5-10 years. Which brings us back to Mr. Bouchouev’s story again.

He makes the provocative point that part of the reason commodity returns have been poorer in recent years is because markets have tended more toward contango (higher prices for distant contracts than for those nearer to expiry) than backwardation, and moreover that that is a consequence of the arrival of these institutional investors – the ‘financialization’ of commodities futures markets, in other words. After all, if Keynes was right and the tendency of anxious producers to be more aggressive than patient speculators caused futures to be downwardly biased, then it stands to reason that introducing more price-insensitive, institutional long-only buyers into the equation might tilt that scale in the other direction. His argument is appealing, and I think he may be right although as I said, commodities are still an important asset class – it’s just that the sources of returns has changed over time. (Right now, for what it’s worth, I think the potential return to spot commodities themselves, which are ordinarily a negative, are presently a strong positive given how badly beaten-down they have become over time).

All of that prelude, though, is to point out a wonderful corollary. If it is the case that futures prices are no longer biased lower by as much as they once were, then it means that hedgers are now getting the benefit of markets where they don’t have to surrender as much expectation to hedge. That is, where an oil producer might in the past have had to commit to selling next year’s oil $1 lower than where he expected to be able to sell it if he took the risk and waited, he may now be able to sell it $1 higher thanks to those institutions who are buying long-only indices.

And that, in turn, will likely lead to futures curves being extended further into the future (or, equivalently, the effective liquidity for existing markets will be extended further out). For example, over the last decade there have been several new commodities indices that systematically buy further out the curve to reduce the cost of contango. In doing so, they’re pushing the contango further out, and also providing bids for hedgers to be able to better sell against. So Mr. Bouchouev’s story is a good one, and for those of us who care about the financial markets liquidity ecosystem it’s a beautiful one. Because it isn’t the end of the story. Chapter 1 was producers, putting curves into backwardation to provide an inducement to draw out speculators to be the other side of the hedge. Chapter 2 is Bouchouev’s tale, in which financial buyers push futures markets towards contango, which in turn provides an inducement to draw out speculators on the other side, or for hedgers to hedge more of their production. In Chapter 3, also according to Bouchouev, the market balances with hedgers reacting to economic uncertainty, and speculators fill in the gaps. Of course, in Chapter 4 the Fed comes in and wrecks the market altogether… but let’s enjoy this while we can.


[1] …and beyond the scope of this article. Interested parties may refer to History of Commodities as the Original Real Return Asset Class, by Michael Ashton and Bob Greer, which is Chapter 4 in Inflation Risks and Products, 2008, by Incisive Media. You can contact me for a copy if you are unable to find it.

Summary of My Post-CPI Tweets (June 2020)

June 10, 2020 8 comments

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy. Or, sign up for email updates to my occasional articles here. Investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

  • It’s #CPI day again! These days it seems we live a year in every month, and from a data perspective that’s kinda true. There used to be months when there were no truly surprising data points. Here is my walk-up.
  • Before I do, let me invite folks to take a look at our newly renovated website at https://enduringinvestments.com. It’s like we finally made it into 2018!
  • Anyway, nowadays those data points that used to be surprising every few months come about once every ten minutes or so. Will CPI be one of them? It’s certainly been an…interesting…number over the past few months.
  • The BLS has had to wrestle with collection issues, such as the fact that in the teeth of the crisis they didn’t want to be placing a burden on medical care professionals to respond to a survey. So measuring prices was difficult.
  • And of course the BLS also recently had the issue with coding Unemployment, because we’ve never had a situation like this and so the book doesn’t explain what to do! CPI has some of those too.
  • There was also a much greater dispersion than usual in prices collected, because of wildly different circumstances at each outlet. Lots and lots of craziness. But the net was that we were -0.10% on core in March, -0.45% in April.
  • Here is one example, from this month, that will be important in Used Cars. The Mannheim index had a massive jump, while the Black Book index slipped slightly further. So how do you forecast CPI for Used Cars??

  • It appears that while used car prices rebounded at the wholesale market, they didn’t at the retail level. I think that, and all of the rebound stories, are “yet.” But who knows what that means for this month.
  • I think we ought to get a healthy rebound in Lodging Away from home, which has fallen 14% or so over the last couple of months. And Airfares. But maybe not until next month.
  • Here’s the thing. From the top down and bottom up, it looks very likely that prices will be accelerating going forward. Clearly, everything is getting more labor-intensive and we’re re-onshoring cheap overseas production in some cases. And here’s the top-down case, which is M2.

  • The rise in M2 is unprecedented, and while a near-term precautionary demand for money will depress velocity, the Fed is in a real corner when velocity rebounds, and it will.
  • But that’s not today. Today the consensus forecast is for flat m/m figures on both core and headline. Food will be a big positive contributor, energy a negative contributor (probably) for another month. Net result: wild guesses.
  • To me, it feels like we’re due for an upside surprise. I would guess Medical Care is due for something funky. But I don’t make forecasts in normal times; sure as heck am not going to do it NOW. Good luck folks.
  • It’s almost creepy. Core CPI was very close to flat, at -0.06% m/m and 1.24% y/y. That’s ridiculously close to forecasts given all of the difficulties.
  • I forgot to mention too that the range in forecasts was not all that wide either…there wasn’t anyone with a -0.3% or +0.3% forecast on core. Which is wild!
  • Last 12 core CPIs:

  • Food and Beverages was (only) +0.72% m/m, raising the y/y to 3.88% from 3.39%. I don’t normally focus on non-core items but this is one where we’ve seen massive moves. So I was surprised we didn’t see more.
  • Here is the y/y change in food & beverages. Not at all bad yet. Food at home is +4.8% y/y, but still not as high as those prior peaks. More coming I am afraid.

  • On to more interesting items. Used Cars and Trucks were -0.39% m/m, which weirdly raises the y/y figure to -0.37% from -0.75% last month. But that’s part of the weakness in m/m core. Black Book was closer, as it has been.
  • But used car prices will come back, so get your deals while you can. Wholesale prices have largely rebounded to the pre-covid levels. Retail will get there, once people are shopping.
  • Overall, core goods fell to -1% y/y from -0.9%, and core services to 2.0% from 2.2%.
  • BTW used cars correction: -0.35% this month, not -0.39%, on the m/m. My error.
  • On rents, Primary Rents were unchanged y/y at 3.49%. Owners’ Equivalent was approximately unch at 3.06% vs 3.07%.
  • BUT Lodging Away from Home fell further. -1.53% m/m, bringing y/y to -15.06% from -13.91%. That’s a bit at odds with what I’ve seen personally, but a big reason for the weakness in core.
  • Also airfares was -4.9% m/m, clearly at odds with what is actually happening to city-pairs prices. This must have something to do with when they collected the data, or perhaps there are fewer first class seats and that’s affecting the avg.
  • Y/y the BLS says -29% fall in airfares, which itself doesn’t seem too crazy, so maybe this month is some kind of catch-up. But again, airfares are certainly going to rise – unless we simply forget about social distancing and start running full planes again.
  • So on core, it seems the usual suspects again this month. Rents fine, airfares and used cars and lodging away from home big losses.
  • How about Medical Care? m/m +0.49%, to 4.90% y/y from 4.81% y/y. Pharma flat, but y/y up to 0.93% from 0.78%.
  • Doctor’s Services finally showed some life as doctors’ offices reopen (another place we’re going to see increases if they can take fewer patients, but maybe it’s not nice to do it right away). +0.65% m/m, to 1.80% y/y from 1.23%.
  • But Hospital Services only +0.11% m/m, and the y/y declined to 4.86% from 5.21%. Again, that’s weird in a time of Covid. I think while the last couple of CPI reports were pretty clean, we’re starting to see some stale prices affect the numbers.
  • I’m not saying that because of the overall result…flat core cpi m/m was about right. But it’s WHERE we are seeing some of these things that’s weird.
  • Now, I totally buy Apparel at -2.29% m/m, -7.90% y/y. That makes total sense to me and less clear that turns into a positive number. We’re not going to start making apparel again in the US. I think we’ll get back to flat prices eventually.
  • OK this is interesting. Alcoholic beverages is 1% of the CPI, but this is Alcoholic Beverages at Home since the other part doesn’t make sense. Note that last two peaks were around big recessions? Expect more upside here! Surprised it isn’t already higher.

  • Biggest core declines on the month (annualized monthly change): Car Insurance -67%, Public Transportation -37%, Car/Truck Rental -34%, Women’s Apparel -30%, Men’s Apparel -29%, Lodging AFH -16.8%, Footwear -16%.
  • Biggest gainers, other than Meat, Poultry, Fish, and Eggs (+55% annualized) and Dairy (+12.6%): Recreation (+11.1%) and Motor Vehicle Parts/Equipment (+10.6%) Guess if you’re not buying new cars, you’re fixing the old one.
  • FWIW, Median is going to be very interesting this month. It’s probably going to be around +0.27% ish. Likely to be the highest since January. That’s yet another reminder this inflation ‘slowdown’ is ALL IN THE LEFT TAIL. Big drops in just a few categories.
  • However, one of those left-tail items is not shelter. So, core ex-shelter is now the lowest since well before the GFC. We are nearing non-shelter deflation. Get ready for the agitated headlines.

  • Again, worth remembering is that that dramatic picture is ALL IN THE LEFT TAIL.
  • Hey, let’s talk about the Fed for a second and then I want to turn to Recreation. This number will not change – and actually, no number would – the Fed’s trajectory. They’re going to stay easy, easy, easy. Even when inflation signs emerge.
  • IN FACT, this dip in prices will help the Fed ignore the acceleration, because they’ll say it’s just a rebound. But the key will be that the acceleration will NOT just be in the tail, bouncing back, but the middle of the distribution.
  • So, the Recreation category (5.8% of CPI) rose 0.88% m/m, pushing y/y to 2.11% vs 0.94% previous. Larger jump than Food & Beverages.
  • In the subcategories of Recreation, the biggest jump by far was in Other recreation services, which was +4.99% y/y versus +1.61% last month. Why?
  • In the sub-sub-categories below Other recreation services, we have Admissions rising 3.63% vs 1.23%. But the BIG increase was “club memberships for shopping clubs, fraternal or other organizations, or participant sports fees”. +7.34% y/y vs +2.55%. Discuss.
  • OK 4 pieces of CPI. Actually 5 today. First Food & Energy. Thanks to Food, not as bad by now as I’d thought we’d have been.

  • Piece 2 is core goods. Apparel, e.g.. Not surprising we’re down here, although Pharma (only +0.9% y/y) continues to surprise me. Pharma will rise once we start onshoring APIs. In the meantime, core goods is weak, but not sure it gets much weaker.

  • Core services. Again, polluted by lodging away from home and airfares. This will snap back over the next few months, because I don’t think Medical Care is about to plunge and it’s steadier than Lodging AFH and Airfares.

  • Piece 4, which COULD be alarming: rent of shelter. But, of course, this is all Lodging AFH (I mistakenly put this in core services less ROS in my prior tweet!). So let’s look at piece 4a, that breaks out the stable part of rents.

  • There is nothing surprising here happening to OER. And in fact, home prices seem to be holding up just fine and foot traffic has been increasing. In uncertain times, what’s better than your own home? If you expect deflation, you better find it here. And you won’t.

  • 10y Breakevens today +3.5bps. That’s interesting, and it suggests people are looking past the current figures. But 10y Breaks are still at 1.28%, with implied core inflation well below 2% for a decade.
  • But it’s still a really big bet that deflationary forces will win. And that seems increasingly unlikely.
  • Breakevens are not as big a bet at 1.28% as they were at 0.94% when I wrote this: https://mikeashton.wordpress.com/2020/03/11/the-big-bet-of-10-year-breakevens-at-0-94/
  • OK, that’s it for now. I look forward to the days when all of the one-offs are done. One last comment: if median CPI is in fact +0.27%, then y/y Median would rise. In fact, anything above 0.21% m/m would mean y/y increases from its current 2.70%…
  • I will publish a summary of all these tweets later. Thanks for tuning in. Be sure to visit the website at https://enduringinvestments.com and tell me what you think about the new look.
  • Oh, one more fun chart. Here is the Apparel series. Clothing prices in the US are now down to levels we haven’t seen since 1988. I can finally break out that old tie. Oh wait, it’s price not fashion.

Another month, another set of crazy figures from Airfares, Lodging Away from Home, Apparel, and Cars. Outside of those, there really haven’t been many big surprises. I guess it’s surprising booze inflation isn’t higher yet. But if we were entering into a deflationary period, we wouldn’t see core decelerating only because of left-tail events, and we wouldn’t see Median CPI accelerating. This really gives every sign of just being a set of one-offs that will pass out of the data before long and be replaced by the true underlying trend. Prior to COVID-19, that trend was a gradual but unmistakable acceleration in inflation, so in my view that’s probably the best outcome you can hope for if you are a bond investor: that we settle back to something like 3% in median inflation and 2.25-2.5% in core inflation. There is as yet no sign of the collapse in housing that we would need to usher in another Depression-like scenario, and for all the errors the Fed made back then the one they have not made this time, indubitably, is the error of failing to add enough liquidity. Indeed, the error they’ve made this time is that they have added far, far too much liquidity and there is no good way to remove it.

That isn’t this month’s story, and it isn’t this quarter’s story. Short-maturity TIPS, not surprisingly, trade at very low implied inflation rates even though energy prices have aggressively rebounded – right now, TIPS carry is awful and if you own a short TIPS bond you’re not looking at next year’s inflation. Beyond the front end of the TIPS curve, though, pricing of inflation-linked bonds relative to nominal bonds is almost comical. Yes, real yields are very low and it’s hard to love TIPS just for TIPS. I don’t understand, though, why TIPS aren’t currently beloved compared to all forms of fixed-rate debt. Some of it is indexed money, but I don’t understand why the indexed money is insisting on smashing into a wall. This will all become obvious eventually, and people will look back, and everyone will remember how they were very bullish on breakevens and can’t believe how everyone else messed up. And everyone will be an inflation expert.

Today’s figure doesn’t mean anything to the Fed, as I said before. Well before this all happened, Chairman Powell had effectively abandoned the inflation mandate. Late last year, he’d declared “So, I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.” And then, on February 11th in front of the House Financial Services Committee Powell, in response to a question from Congressperson Ayanna Pressley (D-MA) about whether the central bank could ensure economic conditions such that “anyone who wants to work and can work will have a job available to them,” Powell responded that the Fed will ‘never’ declare victory on full employment. Not a word about inflation in his response. With Unemployment in the teens right now, I think we can safely say it will be a very long time before the Fed makes inflation its primary worry.

But, I think eventually they will.

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