Macro Digest: Fed is wrong on inflation trend - very wrong

'Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair'

Sam Ewing

 

I am in Singapore and a few clients been raising the issue of 'inflation' and the measurement of it…. Then I went back to two old tested ways of approximating 'real inflation' : Year-over-year, YoY, changes to Gold and Energy.

 

The argument being that energy is in everything you have done today and I mean everything…..hence price of energy is big driver of momentum of prices (even for core inflation) the other being more strategic, but several papers has been written on how over time the net change to gold prices is better indicator of inflation than traditional manipulated indicator.

 

This chart then is YoY change of Gold and WTI Crude….

 

 

Gold & WTI Crude including ROC(12 mth- YoY change)

Source: Bloomberg LLP

 

Gold is down 9.6% YoY and Energy gone from +50% up in January to being up 9% presently but edging towards 0%.... hence inflation is more likely to move to sub 1.0% than from 1.4% to 2.0% as Yellen is 'hoping'

 

 

 

 

 

Tonight I speak at the 30^th Annivesary dinner for CFA, Singapore on the 'easy subject' of 30 year investment horizon…..my only prediction? Inflation will be lower in next 30 years not higher… (reducing expected return)

 

 

 

 

No one knows what's going to happen the next 30 years, but using old tested methods Ms Yellen is not only wrong, again, but inflation is going to surprise to the downside as deleveraging and debt drags it down, meanwhile business' is using 3^rd party hiring and resisting any fixed cost expansion on labor making inequality bigger not smaller. Being wrong on inflation is economically more expensive than being wrong on growth as 'higher inflation' has been the one bet to offset the inevitable debt mountain issue.

 

Sorry Ms Yellen, your last appearance as Fed Chairman will do down as major policy error as you insist low-flation is 'transitory'

 

Safe travels,

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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