So, last Thursday we heard from Bank of Canada Governor Tiff Macklem that the bank has more to do on the policy tightening front. He actually came out and said that inflation “will not fade away by itself.”
No, Tiff, it will fade away because you have already overtightened to the point where you have inverted the yield curve by nearly 70 basis points (on the spread between two-year and 10-year bonds).
Why you can’t see inflation beginning to fade away with the deflation in asset markets – equities first, housing second – does indeed deserve an explanation.
Or, how about what is happening in real-time to materials prices? From the peaks, lumber is down almost 70 per cent; aluminum (down 40 per cent); iron ore (35 per cent); steel rebar (24 per cent); copper (30 per cent); agriculture (20 per cent); textiles (16 per cent); and energy, in total, is down 23 per cent – even with the impact of the OPEC+ pledged output cut.
What on earth is he looking at? The 12-month trailing trend in the Consumer Price Index? Talk about chasing your tail, sir – it is among the most lagging of the lagging indicators.
Then we had Federal Reserve governor Christopher Waller also saying last Thursday: “Shelter inflation is a particular persistent component of inflation. Unfortunately, the message is that shelter inflation will likely remain high for several months.”
I mean … what?
The Fed is focused on the “shelter” component of the CPI, which is based on survey data from years back. The service sector component of the CPI is the key ingredient of the Conference Board’s index of lagging economic indicators.
And this is what the Fed is talking about. You have to be kidding me.
The assumption is that these people on the Federal Open Market Committee are smart – so they must realize how ludicrous it is to be chasing lagging indicators. Or maybe there is another agenda – come on, there has to be – in that these folks want to take the punch bowl away. But how egregious, after luring people into cheap leverage to buy homes and equities at ever-crazy price levels through all of 2021, that now the Fed is consumed with asset inflation (which is what I think the real story is here) – this is the classic Lucy and Charlie Brown skit with the football.
Jerome Powell is Lucy and everyone else is Charlie Brown. It’s incredible. And the apologists out there on how “Jay is doing a great job!” boggle the mind.
In the meantime, real-time data show that rents and home prices are now deflating. Not merely slowing, but deflating. To this Fed it’s not about where inflation is heading, but where it’s already been. The labour market clearly is not as tight as the Fed and everyone else on business TV says it is. Who out there is talking about the fact that gross domestic income was revised sharply lower in the first half of the year, and that all of it was out of wages and salaries? But this Fed is focused on job vacancies, which have absolutely no correlation with wage inflation or price inflation. None.
Jay, why were you adding mortgages to the balance sheet in the face of a massive housing bubble? Why did you keep easing monetary policy into massive fiscal largesse and the reopening of the economy? You see, these are the things that the media never dare ask him at those postmeeting press scrums.
This is the weakest set of FOMC members I can recall in my near-40 years in the business. Mr. Powell has the temerity to compare himself to Paul Volcker, the Fed chair who was widely credited for having ended the high levels of inflation seen in the 1970s and early 1980s.
But Mr. Volcker inherited the inflation situation he had to deal with. Mr. Powell and his crew are just cleaning up their own mess. And now they are in the process of overtightening just as they over-eased. Both in relation to the economy and the market, the Fed has created the conditions for a boom-bust in both. The movie from March, 2020, to December, 2021, when TINA and FOMO predominated and Jay Powell played the role of bartender, is now winding down as he takes the punch bowl away.
As for stocks, you know you are in a bear market when the number of soaring sessions in equities is off the charts, as we’ve seen recently. These do not happen in bull markets, which is a slow ride up the escalator. The years when the market soars on repeated sessions happen in bear markets and speak to the elevated volatility and shortcovering rallies that are part and parcel of bear markets – which we clearly have been in, and remain in.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
David Rosenberg