A conversation today sparked some thoughts around sentiment inflation, negative rates, etc… So I am blatantly recycling them here. Happy Valentines Day!
I just spent the last 3 days at an institutional investors conference and boy are they a bearish lot. I am a little more worried about a “boardroom recession” as a result. More on this below and to follow. But the most perplexing thing was a general fear of inflation. This came up in multiple conversations from multiple angles with people who are very thoughtful and smart.
The answer to this, I think, lies in the authentic-but-unrepresentative experience of people on the fast-track of a two-track economy. But first lets slay that inflation shibboleth. BTW – any day you get to write “shibboleth” is a good day… 🙂
The existence of negative to near-zero rates globally proves the absence of inflation. Really. No room for debate. Try this thought exercise.
- If the 10 year treasury is at 1.75% and economic growth is 1% to 2%, then we have a effective inflation rate of -0.25% to +0.75%. Just how the math works.
- If you are going to assert that inflation is higher, then you are basically asserting that economic growth is zero to negative. And things just aren’t that bad….
- Or you can assert the Fed is “manipulating the market.” But if the Fed were manipulating successfully, people would borrowing all this free money and spending like mad. They aren’t. QED. And note the Fed just RAISED short term rates and long-term rates just went DOWN. Not great manipulation if that’s their goal.
But lack of general inflation doesn’t mean my peers and I aren’t experiencing inflation. Because inflation is not a general thing. The inflation rate for affluent people has been above the general level of inflation. Heck – pints of craft beer are like $7-$8 a pop these days. I’m deeply worried about inflation!!!!
We all understand that different prices for different goods go up and down. But inflation also varies by
social class (whoops! can’t use that word. I meant “income strata”). Inflation depends a lot on the mix of goods and service you consume. That mix varies by class income strata. And the higher up the income scale you go, the worse “inflation” gets.
Paul Singer was feeling this pain when he implied that government inflation numbers were political fakes. But you have to laugh out loud at his (ahem) “real world” experiential argument. This is a guy who needs to get out a little more… (full text and link below).
- “check out London, Manhattan, Aspen and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like.” He forgot to mention how much NetJets is charging these days. I hear its outrageous! 🙂
Things affluent people like to buy more of HAVE gotten stupid expensive. Mostly because the increasingly affluent are increasingly isolated in bidding increasing amounts against decreasingly few of each other, but I digress…
- Housing in San Francisco, New York, Boston, the Hamptons, etc…
- Fancy coffee, burgers, cocktails etc… (partly driven by the above soaring real estate prices and also as positional goods). Whole foods/organic feel-good-y stuff. No properly coddled affluenza sufferer can thrive and go to Harvard without it…
- Education – private schools today have facilities no-one would dream of even 15-20 years ago. College tuition costs are insane. Plus the kids “have” to go to grad school.
- Art. Travel. Etc….
So it is true that inflation for “people like us” has been going up. The problem is generalizing from our experience to the broader population. Negative/low rates tell us that just ain’t true. Most people still drink Budweiser. Scary I know, but the numbers say its true. Even if Bud no longer for sale at most places I normally go….
This insularity is where/why I am deeply worried about a “boardroom recession.”
We’re going to always have an elite. But there’s a difference between a “healthy” elite class and a disconnected one. Insularity is the best explanation for deeply held, clearly, simply wrong “tribal” beliefs around things like inflation. Inside the bubble, prices are going up so inflation is perceived. And there isn’t enough experiential data bubbling in from outside the bubble to keep things in perspective.
This raises the risk of a boardroom recession. Just when things started to seem pretty decent out there in Wal Mart land (cheap gas, higher quit rates, low layoffs). The Paul Singer’s of the world apparently came back from Davos with their underwear in knots. I mean that literally in this case, although Davos is a useful whipping boy. Read this quote from Cisco’s CEO speaking yesterday.
“So the last 3 weeks of our quarter were the first 3 weeks of the calendar year, and that was when — the last week of our quarter was when we were in Davos and you had a 1,000 point swing in the same day on the Dow, right? That was what we were experiencing. That’s what our customers were seeing. And so we had the first 10 weeks that actually moved along exactly as we expected. And then the last 3 we saw this pause from our customers and we saw our teams were missing their forecasts and missing their forecast, and they’re usually pretty good at that.”
The question is which is the chicken and the egg here? Davos or the 1,000 point swing?
FWIW I think this elite disconnect is really what is hurting Hillary. That is why Bernie’s “$650,000 Goldman speaking fees” punch keeps landing so hard. From the outside looking in, she just looks like another member of the elite “deep state.” She may not see herself as another Paul Singer, but she’s in the same bucket when viewed from far enough away… The average Joe is angry at the entire elite class. And the Clintons have burrowed deep into the deep of that deep state…
I’ll wrap with a Krugman “economist hat on” piece on inflation’s absence from May 2013. It is
terrifying sad perplexing that he could re-publish it today with basically no editing….
“Economists who had studied such [liquidity]traps — a group that included Ben Bernanke and, well, me — knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment.” http://www.nytimes.com/2013/05/03/opinion/krugman-not-enough-inflation.html?rref=collection%2Fcolumn%2Fpaul-krugman&action=click&contentCollection=opinion®ion=stream&module=stream_unit&version=search&contentPlacement=1&pgtype=collection
Here’s Krugman’s more political analysis of why. Whether you agree with this, he is still right about the above (see “Nobel Prize”)…. http://www.nytimes.com/2014/07/18/opinion/paul-krugman-addicted-to-inflation.html?rref=collection%2Fcolumn%2Fpaul-krugman
PS: Full Paul Singer quote is below. My guess is that he’s spent so long in the hedge fund shark tank that he just assumes everyone is lying/cooking the numbers to “talk their book” – including the government. I do think things are pretty rotten out there, but the US Government is still not run like a hedge fund…. He really should get out a little more.
“But regardless of the purported results for the rest of 2014 and into 2015, all of the reported growth numbers are too high, because the official inflation number is too low. Over a long period of time, these figures have become politicized, always in the direction of under-reporting inflation. Constant repetition has resulted in most policymakers and economists now just accepting the adjustments and tricks that have become part of the reporting culture. From the notion that there is “core” and “non-core” inflation; to ignoring house prices and using “rental equivalence”; to “hedonic adjustments” according to which, if your computer is “better” than last year’s, then you should subtract an amount from the actual price every year to reflect that improvement, even though it is subjective and not really quantifiable; to a handful of other nonsensical adjustments, inflation is understated. Inflation is also distorted by the increasing gap between the spending basket of the well-off and that of the middle class (check out London, Manhattan, Aspen and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like).”