Mish's Global Economic Trend Analysis

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• Another Round-Trip in Crude; Search for Inflation; Another Bout of Asset Deflation Hell Coming Up
• Housing Regulator Wants to Throw the Drowning Poor an Anchor; Mish Alternative Proposal
• Plotting the Fed's Baby Step 1/8 Point Hikes; Yellen vs. Greenspan "Measured Pace"

Another Round-Trip in Crude; Search for Inflation; Another Bout of Asset Deflation Hell Coming Up Posted: 19 Aug 2015 02:14 PM PDT Crude prices are back to where they were in 2004. Before that, crude previously topped near $41 in September of 1990! Recall the hyperinflation talk in June of 2008 when crude hit $147? Cries of massive price inflation again became talk of the town when crude rebounded to a secondary high of $115 in April of 2011. It's been yet another round trip in crude. CPI Barely Positive Today the BLS reported CPI for All Items Rises 0.1% in July as Shelter Index Increases. The Bloomberg Consensus was for a 0.2% rise. Inflation wasn't brewing in July and with oil prices moving lower, inflation may not be showing much pressure in August either. The consumer price index rose only 0.1 percent in July as did the core, both under expectations. Year-on-year rates show slightly more pressure. Overall inflation is up 0.2 percent, which is very low but up from 0.1 percent in the prior month and the second positive reading of the year. The core is steady at plus 1.8 percent which is just under the Fed's 2 percent target. Gasoline moved sharply higher in July, up 0.9 percent following outsized gains of 3.4 percent and 10.4 percent in the prior two months. But with gas prices moving steadily lower this month, the upward effects of gasoline will be turning downward in August. Another major component showing upward pressure in July is apparel which rose 0.3 percent following, however, a long string of declines. Owners equivalent rent continues to show pressure, up 0.3 percent on top of June's outsized gain of 0.4 percent. Elsewhere, however, pressures are hard to find with electricity down 0.4 percent, used vehicles down 0.6 percent, new vehicles down 0.2 percent, and airfares down 5.6 percent. Medical, drugs, and education all rose only 0.1 percent. There may be some upward creep in the headline year-on-year rates but, given the ongoing decline in oil, this report won't be pushing the Fed for a September rate hike. CPI Percent Change From Year Ago (All Items) CPI Percent Change From Year Ago (All Items Less Energy) If we strip out the effect of energy, the chart looks like this. Search for Inflation Those who claim inflation has been tame, don't know where to look. Here's where to find it. Stock prices Bond prices Rent rices Housing prices Food Inflation has been soaring since March 2009 with the revival of the junk bond market. Fool's Mission Central bankers, led by the Fed have strenuously attempted to hit preposterous 2% inflation targets to no avail. The result was massive bubbles in equities and corporate bonds (especially junk bonds), globally. Few see those bubbles because they have not yet popped. But they will, and signs are picking up the time is now. Another Bout of Asset Deflation Hell Coming Up In a foolish endeavor to spur price inflation, central bankers have guaranteed another round of destructive asset deflation. Credit deflation will follow because loans made on the assumption of forever rising asset prices will once again become impaired. For the real scoop on the idiocy of 2% price inflation targets, please see Historical Perspective on CPI Deflations: How Damaging are They? Mike "Mish" Shedlock Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Housing Regulator Wants to Throw the Drowning Poor an Anchor; Mish Alternative Proposal Posted: 19 Aug 2015 11:13 AM PDT Now that home prices have recovered from the Great Financial Crisis to the point of being way overvalued again in many areas, a Housing Regulator Targets More Support for Poor Borrowers. The regulator for U.S. housing finance giants Fannie Mae and Freddie Mac told the two firms on Wednesday to provide more support to low-income Americans taking out mortgages and refinancing home loans. The Federal Housing Finance Agency released goals for the two government-controlled firms for 2015-2017 that would advance agency chief Mel Watt's aim to widen access to housing credit. The rules direct Fannie Mae and Freddie Mac to expand the number of loans they back for low-income families to 24 percent of the their purchases of single-family home mortgages over the period, up from a target of 23 percent in 2014. FHFA also asked each firm to make mortgages refinanced by low-income families a bigger share of their refinancing purchases, and to increase the number of mortgages they buy for multi-family properties each year. Throw the Poor an Anchor The increases are small. But they are also symbolic of the same attitudes that got us in trouble before. It would have made far more sense to widen availability in 2009 when homes were more  affordable. Now after prices have recovered, regulators again want to "do something" to make housing more affordable. But the more support they give, the more people are encouraged to buy beyond their means, and the more prices rise. We don't need regulators of this nature. Nor do we need a Fed price-fixing interest rates. Both contributed to the housing boom-bust and both are back at it again. No one learned a damn thing. Mish Proposal Shut down Fannie Mae Shut down Freddie Mac Shut down the FHA Get the hell out of Ownership Society promotion End all affordable housing programs Let free market forces regulate the market Mike "Mish" Shedlock Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Plotting the Fed's Baby Step 1/8 Point Hikes; Yellen vs. Greenspan "Measured Pace" Posted: 18 Aug 2015 11:58 PM PDT The market still believes the Fed will hike rates in September or October. The CME's FedWatch Sees it like this. That table is based on Fed Fund Futures and option bets. I highly doubt the Fed will think about a half-point hike no matter how strong the economic data between now and the September 16-17 meeting. Fed Funds Futures expire on the last day of the month but settle at the average rate for 30 days prior. Using Fed Funds Futures (not options) from August 18, I generated the chart and table below. Implied Fed Funds Rate 2015-08-18 click on any chart for sharper image Comments Rate hikes will not be that smooth. For starters, meetings are 8 times a year, not 12. The current Fed Funds Rate as of August 18, 2015 is 0.138 percent.  The implied rate for September is only 0.185 percent (but that is a 30-day average). The implied rate does not hit 0.25 percent until October. That would roughly be a 1/8 point hike from the current rate of 0.138 percent. The next 1/8 point hike would not occur until December or January at the earliest. Let's assume the Fed actually does get a hike off in September if for no other reason than the market expects such a hike. Based on Fed Fund Futures and FOMC Meeting Dates, and taking into account 30-day averages, the table of future rate hikes looks something like this. Rate Hike Dates and Amounts Month Fed Funds Future Implied Fed Funds Rate Meeting Date Market Expectation Aug-15 99.863 0.138 Sep-15 99.815 0.185 16-17 0.250 Oct-15 99.755 0.245 27-28 Nov-15 99.730 0.270 Dec-15 99.675 0.325 15-16 0.375 Jan-16 99.625 0.375 26-27 Feb-16 99.585 0.415 Mar-16 99.535 0.465 15-16 0.500 Apr-16 99.475 0.525 26-27 May-16 99.430 0.570 Jun-16 99.375 0.625 14-15 0.625 Jul-16 99.315 0.685 26-17 Aug-16 99.255 0.745 Sep-16 99.220 0.780 20-21 0.750 Oct-16 99.155 0.845 Nov-16 99.075 0.925 01-02 0.875 Dec-16 99.010 0.990 13-14 1.000 Jan-17 98.970 1.030 31-01 Feb-17 98.885 1.115 Mar-17 98.850 1.150 1.125 Apr-17 98.795 1.205 1.250 May-17 98.730 1.270 Jun-17 98.700 1.300 Jul-17 98.655 1.345 1.375 Aug-17 98.600 1.400 Sep-17 98.560 1.440 Oct-17 98.520 1.480 1.5 Nov-17 98.470 1.530 Dec-17 98.430 1.570 Fed Funds Futures strongly suggest the Fed will move to 1/8 point hikes, down from current moves of 1/4 point or more, and widely spaced at that. Taking into account FOMC meeting dates, I created the following chart. Fed Interest Rate Hikes and Dates (Implied from Futures) Yellen vs. Greenspan The above market expectations are clearly similar to Greenspan's famous statement: Hikes will be at a "pace that's likely to be measured". The Yellen expected "pace" is half as often. The Yellen expected "measure" is half as much. Measured Pace Revisited Inquiring minds may wish to investigate my November 6, 2007 commentary on Greenspan's "measured pace", well ahead of the crisis: Greenspan on Housing, Central Bank, Gold. Even at the above half-pace, half-measure set of market expectations, I suggest we will not see many of those hikes. Instead, I propose the Fed delayed hikes so long, that an interim recession will gum up the works leaving the Fed no room to cut. My recession warning still stands. Mike "Mish" Shedlock Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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