inflation - to be or not to be

After four years of unprecedented balance sheet expansion and monetary easing by the Federal Reserve, many critics of Fed policy have warned of the potential for massive inflation (or even hyperinflation) as a consequence. Peter Schiff, CEO and chief global strategist of Euro Pacific Precious Metals, is one of them.

Meanwhile, the headline Consumer Price Index most recently showed a 1.8% increase, a number that monetary doves lean on as evidence that there is no inflation and that central banks should not be constrained in their money printing ways.

New York Times columnist and economist Paul Krugman is among those who recently took aim at Schiff for his inflation predictions, saying people in Schiff’s camp need to rethink their approaches to modeling the economy. Schiff in turn has responded in an article and video post, attacking the CPI as “meaningless.”

“It is sheer propaganda,” Schiff tells The Daily Ticker. “Prices are rising at a much more rapid rate than the CPI would suggest.”

Schiff points to changes in methodologies for calculating CPI as one problem. The index reports on price movements and consumer choices and substitutions. Schiff looked at Bureau of Labor Statistics price changes for 20 goods and services between 1970 to 1980 and again between 2002 and 2012, decades that Schiff says were both periods of large deficits and loose monetary policy.

Schiff found that his basket of goods increased 61% faster than CPI for the period between 2002 and 2012. In contrast, his basket rose just 5% faster than CPI from 1970 to 1980.

“How can you believe these statistics when the numbers are so flawed?” Schiff asks in response to his research on CPI. “I don’t care what the government is telling me. If the government weatherman tells me it’s a sunny day and I can see it’s pouring rain, I’m not gonna believe the government, I’m gonna go outside with an umbrella.”

As for the true state of inflation, Schiff argues it’s closer to 7% or 9% and going higher. And he sticks to his claims that we could have hyperinflation if foreign central banks start selling dollars.

(source unknown)

range bound?

Looks like we have been range bound throughout 2011 and 2012 – will we break out of this range in 2013?

Employment Change Indices

Lacker votes against....again

Minutes of the Federal Open Market Committee

December 11-12, 2012

Voting against this action: Jeffrey M. Lacker.

Mr. Lacker dissented because he objected to the asset purchases and to the characterization of the conditions under which an exceptionally low range for the federal funds rate would remain appropriate.

He continued to view asset purchases as unlikely to add to economic growth without unacceptably increasing the risk of future inflation, and to see purchases of MBS as inappropriate credit allocation.

With regard to the funds rate, Mr. Lacker was concerned that linking the forward guidance to a specific numerical level of the unemployment rate would inhibit the effectiveness of the Committee's communications and increase the potential for inflationary policy errors; he preferred qualitative guidance instead.

from FOMC Minutes - December meeting

Financial conditions in the commercial real estate (CRE) sector were still generally strained amid elevated vacancy and delinquency rates. However, prices for CRE properties continued to increase in the third quarter, and issuance of commercial mortgage-backed securities remained at a solid pace in the current quarter.

Residential mortgage rates declined modestly over the intermeeting period, largely in line with the decline in MBS yields. Refinancing expanded a bit further in October and November. House prices continued to increase despite a rise in the proportion of properties sold through foreclosures or short sales. The share of existing mortgages that were seriously delinquent fell in the third quarter but remained elevated.

Consumer credit continued to expand briskly in September, led by sizable increases in auto and student loans. Revolving credit decreased in September but was little changed, on net, over the previous few months. Issuance of consumer asset-backed securities continued to rise at a strong pace. Delinquency rates on consumer credit generally remained low, with the notable exception of student loans.

Bank credit was about flat, on balance, over October and November. Growth in C&I loans and consumer loans was offset by a decline in banks' residential real estate loans. The November Survey of Terms of Business Lending indicated some easing in loan pricing and terms.

M2 growth was rapid in October but slowed in November. Liquid deposits continued to grow at a strong pace, as yields available on alternative money market instruments remained low. Reserves increased over the intermeeting period, in part because of the settlement of the ongoing MBS purchases announced at the September FOMC meeting

http://www.federalreserve.gov/monetarypolicy/fomcminutes20121212.htm

mortgage vs treasury debt

Interesting graphic regarding the change in mortgage and treasury debt in our economy….As the article infers – will this trend continue and provide us with low rates for quite some time?

The Housing Bust Gave Birth To A Trillion Dollar Buyer Of US Treasuries

 

 

UBS's Maury Harris, who is frequently recognized as the most accurate economist on Wall Street, shared an important chart with Business Insider when we had lunch with him last week.

It compares the year-over-year change in U.S. Federal government debt and home mortgage debt for each year since the heyday of the housing bubble.

"Over the past 6 years, an around $1 1/8 trillion downsizing in per annum net home mortgage financing has accompanied an around $7/8 trillion upswing in federal borrowing per annum," said Harris. In other words, the size of the mortgage bond market has shrunk by much more than the Treasury bond market has grown.

Back when the U.S. housing market was booming, the mortgage bonds it generated was an enormous source of fixed-income securities for investors. Today, with home prices way down and home purchases only beginning to recover, the size of the mortgage bond market is only a fraction of what it used to be.

Meanwhile, data suggests that demand for bonds is only growing.

"Federal borrowing is 'filling in' instead of 'crowding out,'" said Harris.

You could actually argue that there isn't enough debt out there going around.

Harris believes that the tight supply in the bond market will keep investors buying Treasuries for years.

This dynamic should quell some fears that demand for Treasuries will just disappear and send borrowing costs/interest rates surging in the near-term.

Read more: http://www.businessinsider.com/maury-harris-on-treasury-bond-demand-2012-12#ixzz2GMActeIa

 

Commercial Real Estate Vacancy Rates Improving

Will improving vacancy rates generate improving valuation trends as well as lower cap rates as we move forward into 2013?

CRE vacancy rates remained high through June of 2012 but improved for all types of commercial property(see figure 4). Private sector forecasts call for continued improvement but at a slow pace given expectations for weak economic growth. Low interest rates have helped CRE borrowers, but many borrowers may find it difficult to refinance in the near term because of elevated loan-to-value ratios. Small banks in general have higher CRE concentrations and are therefore more vulnerable to declines in this asset class.

Figure 4: CRE Vacancy Rates

 

OCC’s Semiannual Risk Perspective, Fall 2012

Vital Signs Chart: Fed’s Balance Sheet Expands

How big will it grow? Word is over $4 trillion before they are done with all of the QE's....not sure that is where we should be headed!

 

The Federal Reserve’s balance sheet continues to expand as the central bank prepares to tweak its bond-buying program at a two-day meeting starting today.

The Fed’s asset holdings reached$2.86 trillion in the week ended Dec. 5, up from $2.85 trillion a week earlier.

Among the holdings are $1.65 trillion in U.S. Treasury’s and $884 billion in mortgage-backed securities.

 

 

http://blogs.wsj.com/economics/2012/12/11/vital-signs-chart-feds-balance-sheet-expands/?mod=WSJ_latestheadlines