Question for Economist's View
Up front let me say that I have nothing but the greatest respect for Mark Thoma, the author of the blog Economist's View. With that in mind I was going to write about an article posted today but soon found that I would be writing about it for about 5 hours. I have boiled down my thinking about the post to two questions, and if Mr. Thoma for some reason that I cannot fathom should ever come across this blog, I would be most interested in his reply.
But first, the post in question. You can read the entire piece here and I would suggest you do. Mr Thoma cites Tim Duy in a discussion about keeping steady monetary policy for some time. This means ZIRP for as long as well into 2010, as stated here at Economic Disconnect for over a year. The major reason Economist's View sees inflation as a non issue is low to no wage growth. Excerpt of the summary at the end of the article:
"..Lacking a story that leads to strong wage growth in the near - or even medium - term, the Fed is almost certainly on hold at least through this year and likely well into 2010, allowing the size of the balance sheet to adjust according to the needs of the financial markets while keeping interest rates at rock bottom levels. That doesn't mean all that easy money will not show up somewhere - technical analysts are looking for US equities to explode on the basis of recent market action. But will the Fed lean against such an explosion without clear and convincing evidence that the labor market is poised for strong, sustainable improvement? I doubt it - and for those looking for it, therein lies the ingredients for making the next big bubble."
My two questions are:
1.) In the 2002-2007 time frame wages were flat to lower yet inflation was a real issue. How does your central argument (no wage pressure = no inflation) account for such a recent example that disproves it?
2.) If wage increases are the driver of inflation and bubbles, how can reconcile the 2002-2007 wage issue with the credit driven housing bubble? May there be other drivers of asset values, namely cheap credit and easy access to money? If so, how is accommodating FED policy here a "good" thing?
I am of two minds here. I would love to hear the response, yet I am terrified to get my butt kicked by a real professional! We shall see!
Follow Up on Last Nights Stories
Last night I covered two issues that had some additional information added today so I will expand on those ideas.
China Learns Fast
In the last article I highlighted the China stock market drop this way:
The Chinese learn fast. The best way to influence monetary policy here in the US is for the market to throw a "hissy fit" to the tune of down 5% in response to any take away of the punch bowl. Greenspan was a total sucker for this play, and recently the TARP was passed on it's second attempt after a daring market drop played out by Wall Street.
Today we get a policy "clarification" from the Chinese central bank on the issue of liquidity (via Clusterstock):
China Can't Take Away The Punch Bowl
Monday's 5% drop in the Shanghai market was a stark warning to the credit-happy central government: do a U-turn on cheap money, and this is what you get.
So the government is already sending out signals that it won't be tightening any time soon.
The article excerpts a Wall Street Journal piece which cites an analyst with thus:
"China's top policymakers have repeatedly assured that the current policy stance will be maintained. Note that the People's Bank of China, unlike the Federal Reserve or European Central Bank, is just part of the government and there is no way for the PBOC to run counter to the president or the cabinet"
See, no worries. The money will flow (just like the spice! Obscure reference).
The economic proverb is now:
"Ask and you shall receive...the ladle to the punchbowl" Book of Greed 3:16
After the poor 5 year bond auction yesterday, all eyes were looking towards today's 7year offering. This morning I had the following exchange on SA with loyal reader Manya05:
Treasury auction, what do you make of it? time to jump back into TBT and PST? too soon? or should we do it before they are outlawed?
While I never like to do specific ticker discussions, I offered this note:
I would say the auction went bad, but that it does not matter. The key will be today's 7 year sale; if the US government cannot get some interest after a poor auction (via arm twisting) then we may indeed have an issue developing, not that the markets (equity) will care anyway. I would say TBT/PST are a great short term play (like hours, never hold overnight) if you think there will be an issue with the 7 year today. I think the sale will go very well, so I would not run with those today. But that's me.
The 7 year sale went just fine, though one would have to wonder why 5 year notes were less than chased, but 7 year notes were a hot item. What's two years between friends? This kind of disconnect is hard to figure out.
Media Searches for Reasons for Market Rise
Last article I showed how two durable goods reports were handled in two very different way depending on how they came out. Tim Iacono over at The Mess That Greenspan had a great catch today that showed a similar gaff relating to today's jobless claims. Check it out here.
At first I was worried my story was scooped, but it appears there is enough media funny business to go around.
This morning at 10am I saw the market opening much higher and looking really strong. I had scanned some articles in the morning and failed to see much that would have pushed such a rally from the get go. I stopped at Yahoo Finance at about 10:05 am and saw this leader (click for larger view):
The headline attributed the stock market surge as related to the dollar declining and the China rebound:
"The US market rises Thursday morning as the dollar declines and China rallies,.."
Now with an eye towards the 7 year bond sale, I was greatly interested if the dollar was declining and by how much. This might provide some clues as to interest in the sale later in the day.
I loaded up the dollar chart and here is what I saw at about 10:07am (click for larger view):
Notice the huge dollar drop at the right hand end at 9am-10am. Oh, you missed it? Well, maybe the chart was delayed or something. It should be clear on the one day chart:
Clearly there was no large move in the dollar at all.
The biggest tell that something is wrong is the plethora of reasons being offered for the markets fast rise. A big gap up in the morning had to be for some reason and Yahoo tried it's best to find one. The markets have an active partner in the media, and this example should show how far things have gone.
Have a good night.