Latest data show Japan already achieved the liquidity objectives of “Qualitative and Quantitative Easing” (QQE). Now it’s time to shift to the next phase. The first look at 4Q2017 Japanese economic data shows solid income and consumption. Yet, Japan faces challenges to: Address its squashed population pyramid and excessive debt Fully embrace the global tech and trade transformation it catalyzed in the 1970s Draw women into the workforce to fill jobs and grow household income Recover the innovative spirit of “Japan, Inc.;” instead, industry has focused mostly on efficiency Private spending and net exports matter most to growth Japan’s…
Author: Brian Barnier
Too many traders reacted with confusion to the February 2nd Bureau of Labor Statistics release. You can do better. Learn the context to act with better clarity on February 14th. From a high on Friday, January 26th, the S&P 500 Index started falling. Yet it wasn’t until Friday, February 2nd that a trigger was widely mentioned – the good news of strong wage gains. Trader’s feared good economic news would lead to higher goods and services prices that would cause the Federal Open Market Committee (FOMC) to raise the Federal Funds rate faster. Specifically, in the Bureau of Labor…
The global tech and trade transformation has enabled a greater supply of funds in more global markets and lower costs of production – leading to a lower natural interest rate. Knut Wicksell[i], a pioneering Swedish economist, wrote in 1898 that “There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tends neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form…
As the Federal Funds rate increases, investors and the Fed expect a proportional move in the 10-Year U.S. Treasury yield. Is that expectation reasonable? History says, “no.” Using such expectations for investing is risky. The linkage is weak and can lead to major errors. Today, with Federal Funds (FF) rate increases expected, investors and the Fed use “rules of thumb” for the relationship between the Federal Funds (FF) Rate and the 10-Year U.S. Treasury (10UST) bond yield. An example from the Fed is that it takes 75 basis points (bps, 1%=100 bps) of Federal Funds rate cut to get…
Productivity is not designed to measure technology improvement. Investors, avoid the price-productivity assumption when forecasting “inflation.” Instead, look at more direct links between the global tech and trade transformation and prices. Analysts trying to explain the weaker growth in product prices often reject tech improvement as an explanation because measured productivity growth has been weak. This approach makes assumptions that – you guessed it – aren’t quite true, such as: First, assumes a consistent trend in productivity gains and lower prices. The Bureau of Labor Statistics (BLS) has published data on durable goods manufacturing and services from 1987 to…
The tech and trade transformation changed production, shopping, and inflation. It also changed funds flows in the 1980s, increasing the daily forms of “money” and enabling autonomous financial markets. This undermines the Fed’s ability to achieve an inflation target. For investors, it means watching how well the Fed “gets” the problem and rethinks its actions. How effective are central bank tools? Short answer: less than in the past This debate is huge. To simplify, first, we’ll stipulate that the Federal Open Market Committee’s (FOMC) initial intervention for stability was helpful. Second, rather than diving into the debate about the…
Today’s lower prices aren’t mostly due to monetary causes. And, they’re fine if shoppers buy more. Central bank attempts to fight lower costs and prices just cause distortions and inequities because monetary policy is a blunt instrument. Investors, avoid outdated theory. Instead, stay ahead of the Fed by focusing on specifics of product prices. What is inflation? Inflation is the increase in general price level. More strictly, the price increase caused by an increase in money supply or lower central bank “policy” interest rate (in the U.S., the Federal Funds rate). “Inflation” is a word often used loosely. For…
The mysterious behavior of inflation is undermining classical economic theory and perplexing the Fed. As the U.S. central bank seeks to normalize monetary policy, the classical benchmark for interest rate tightening remains elusive. Why? At Fed Dashboard & Fundamentals, we believe the inflation mystery is solved simply by examining the data and breaking with outdated groupthink. For example: Lower prices are not necessarily a sign of weak demand. Rather, shoppers buy more when prices fall. Lower costs mostly flow from the global tech and trade transformation since the mid-1990s. Domestically, slower growth of price increases in health care since about…
Japanese consumers shopped well from 2001 to 2Q2014, stronger than U.S. shoppers in much-watched durable goods. They accomplished this while paying down debt through 3Q2012. Investors should know: Talk of weak shoppers for the past two decades just isn’t in the data. It’s a myth. Prices don’t need to rise to spur consumption; shoppers bought more in the category where prices fell most – durable goods Prime Minister Abe’s call for innovation, structural and workplace reform will tend to lower prices These insights frustrate the Bank of Japan’s quantitative easing (QE) plans A tale of two countries “Japan, Inc.”…
The Fed looks to the official unemployment rate to indicate future inflation. But, that relationship – the “Phillips Curve” — hasn’t worked well for decades because: The official unemployment rate has been an increasingly poor reflection of available productive capacity (“slack”) Price moves are more about cost and competition, influenced by government regulatory and fiscal policy, than by monetary policy Average price for all goods has been falling for the past two decades – diverging from labor-intensive services – a dramatic change in our economy Bill Phillips wanted to understand how the economy works. He was born in New…
The effectiveness of the Fed’s key policy tool to manage our economy may be weakening. We have observed the Federal Funds rate: Has not been consistently cascading through credit rates for decades, reducing the benefit to borrowers Is not the major influence on most business investment decisions Is less influential against the growing forces of global liquidity flows, non-bank lending, and financial regulation Global influences on the Federal Funds rate include: Sovereign debt Credit Default Swap rates and credit risk Stability of foreign and domestic banking systems Foreign exchange, including interest rates as part of weaponization of economic policy in…
Growth in real incomes for people in Japan, especially younger workers, signals to the Bank of Japan that is time to shift to its next strategy and signals younger people to have more babies. Personal income growth around 2% adds to our prior analyses of the strength of purchases by the average Japanese shopper. Data from the Cabinet Office, Economic and Social Research Institute, shows personal income growth rebounding since 2Q2014 – with strength not seen since 1995-1997. Causes of the 2013-14 weakness are mostly quantitative easing (QE) starting in 2Q2013 and increase in the value added tax to…
In each of five equity market phases since 1951, just one factor explained over 90% of equity market growth in that phase. This reinforces the need for a macro-driven portfolio – first in risk management, then in equity selection Fundamentals follow macro, especially business model-based investing Because macro patterns change slowly, it’s less stressful investing ETFs were most aggressive in growing the “Trump bump” In August 2015 – surprising more than a few readers – we wrote how just one factor per phase explained over 90% of the growth in each of five market phases since 1951. Now, that…
The wrong view of Japan’s economy is stagnation. Data describe a different, more vibrant story: Tech, business efficiency, and structural reforms tend to lower costs and prices, despite Quantitative Easing (QE) Shoppers tend to buy more when prices fall, especially strong in durables Japan’s exporters built efficient conversion engines for turning imported raw materials into valuable exports. Structural reforms, free trade agreements, and babies matter far more than QE Thus, Investors would be well-served to 1) revise macro model inputs to reflect data, not outdated theory and 2) seek companies taking advantage of tech, trade, and change Removing Noise…
Contrary to usual views, Japan’s Potential GDP is higher than estimated because: Available labor hours are greater Labor is less of a constraint because, on average, relatively less labor is used to produce More output can be produced from any given Yen value of buildings and equipment Estimates of Potential GDP differ in data selected, history included, and how trends are modeled. Estimates also have different assumptions about productivity and how increased resource use would change “inflation” (usually defined as average change of prices). These assumptions are problematic as we’ve shown previously with U.S. data in “Potential GDP is…
As U.S equities hit new bubble highs, it’s high time to avoid assuming that price or price/earnings ratios alone are sufficient to gauge bubbles. Investors are better served by comparing prices to more tangible value measures and global funds flows. “…in the assessment of a few participants, equity prices were high when judged against standard valuation measures” is the most recent view from the Federal Open Market Committee. Surveying market news, most opinions are based on one of two adages. First, “that price is price” thus “no one can see a bubble, that’s why it’s called a ‘bubble.’” Second,…