March 7, 2017

Interesting piece in the WSJ about policy rates and inflation:

On Friday, five top economists presented a paper at a monetary-policy conference saying the main gauges policy makers typically use to understand inflation—such as “slack” in the labor market—don’t actually explain it.

What’s more, the last several years of extraordinary monetary policy have shaken a theory that had held sway for decades in financial markets: American economist Milton Friedman’s view that inflation is ultimately a function of how much money a central bank prints.

In fact, economists who study central-bank operations broadly believe that the amount of money created is a consequence of rising prices, not the cause. That is, if the price of apples goes from $1 to $2, the central bank will eventually need to issue more money to prevent money from getting scarce and interest rates from skyrocketing.

The reality check for economic theory goes further: Surveys show that lower interest rates aren’t a key factor in the decisions of households and businesses to take on credit and spend more.

I don’t know about that last quoted paragraph. In Canada there certainly seems to be a correlation between interest rates and the amount of mortgage debt consumers are willing to assume and I presume that in the absence of special factors this will be universally true.

In the US, of course, those special factors have been tighter credit in general and a bad experience with real-estate during the Credit Crunch. And I suggest it’s reasonable to advance the argument that retail investment in housing will not usually spark general inflation since houses are neither a productive nor a consumptive asset – they just sit there (at least over the time horizon of the purchaser).

The paper at issue, titled Deflating Inflation Expectations: The Implications of Inflation’s Simple Dynamics, is by Stephen G. Cecchetti, Michael E. Feroli, Peter Hooper, Anil K Kashyap and Kermit L. Schoenholtz; the abstract is provocative:

This report examines the behavior of inflation in the United States since 1984 (updating Cecchetti et al. (2007)). Over this period, the change in inflation is negatively serially correlated, and the change in inflation is best predicted by a statistical model that includes only information from the two most recent quarters. We find that the level of inflation fluctuates around a slowly changing trend that we call the local mean of inflation. Few variables add extra explanatory power for inflation once the local mean is taken into account. This local mean is itself well characterized by a random walk. Labor market slack has a statistically significant, but quantitatively small, effect on the local mean and inflation expectations have no effect. Some financial conditions that are influenced by monetary policy have larger effects on the local mean. Concretely, this means that one‐off moves in labor market slack or inflation expectations that are not mirrored in broader indicators of inflation pressures are unlikely to be predictive of changes in trend inflation.

John Crow and Paul Volcker must be beside themselves with rage – but we’ll just have to wait until the monetarists make their counterattack for the next installment in this saga.

The WSJ has another interesting story today, discussing the shortage of truck drivers. How do you fix a problem? Throw money at it!

Drivers typically receive training from big trucking companies or schools affiliated with them. Those who become independent contractors sign lease-to-own deals to purchase their vehicles, often with those same companies. But the terms are onerous, and drivers owe so much that they may end up working 70 or 80 hours a week just to pay back what they owe and cover expenses such as fuel and insurance. Drivers are suing some companies that use this model, saying they should be classified as employees rather than contractors.

Even those working as employees have a hard time making ends meet, partly because they are only paid for the miles they drive, not time waiting to load and unload their rigs or sitting in traffic. [sociologist and fellow at the University of Pennsylvania’s Robert A. Fox Leadership Program] Mr. [Steve] Viscelli recounts a 16-hour day spent crawling through traffic in the New York area, only to get stuck at a New Jersey rail yard for the night. That day he drove 215 miles and earned $56.

The industry could fix its labor shortage, Mr. Viscelli says, by raising pay enough to compensate for the hardships of the job or improving the terms for independent contractors. In 2015, heavy and tractor-trailer truck drivers earned a median wage of $40,260, according to the Bureau of Labor Statistics. Mr. Viscelli says that number masks the reality that most drivers work far more than 40 hours a week to get to that income.

Wages have been rising over the past few years and some firms offer signing bonuses, according to ATA chief economist Bob Costello. Such measures helped bring down industrywide turnover from nearly 100% in 2012 to just over 90% in 2014. More recently, driver turnover has declined to around 80% due to less freight being shipped.

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Ratchet 0.00 % 0.00 % 0 0.00 0 -0.1336 % 2,089.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1336 % 3,834.8
Floater 3.61 % 3.82 % 49,875 17.72 4 -0.1336 % 2,210.0
OpRet 0.00 % 0.00 % 0 0.00 0 0.0313 % 3,005.6
SplitShare 4.98 % 3.89 % 62,958 0.74 5 0.0313 % 3,589.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0313 % 2,800.6
Perpetual-Premium 5.35 % 4.61 % 66,446 2.83 20 0.0607 % 2,740.8
Perpetual-Discount 5.16 % 5.22 % 99,887 15.00 18 0.0565 % 2,918.7
FixedReset 4.46 % 4.15 % 232,158 6.73 97 0.0104 % 2,313.3
Deemed-Retractible 5.04 % -0.85 % 135,962 0.14 31 0.0832 % 2,858.6
FloatingReset 2.48 % 3.19 % 50,874 4.62 9 0.0160 % 2,471.5
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MFC.PR.M FixedReset -1.29 % YTW SCENARIO
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Maturity Date : 2025-01-31
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Evaluated at bid price : 21.45
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Bid-YTW : 8.74 %
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Maturity Date : 2025-01-31
Maturity Price : 25.00
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Maturity Date : 2025-01-31
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PWF.PR.A Floater Quote: 14.80 – 15.15
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Average : 0.2758

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Maturity Date : 2047-03-07
Maturity Price : 14.80
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MFC.PR.R FixedReset Quote: 25.57 – 25.75
Spot Rate : 0.1800
Average : 0.1145

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-03-19
Maturity Price : 25.00
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Bid-YTW : 4.33 %

2 Responses to “March 7, 2017”

  1. Nestor says:

    of course, if we keep changing the way we measure so called “inflation” i’m sure we can get it to stay at 1% indefinitely.. stop measuring things that change and substitute with items that don’t change value.

    “core inflation” strips out food and energy… a full reading of CPI doesn’t measure asset prices. hey.. why bother measuring skyrocketing house prices, that might mean CPI of 10% ..heck, let’s print even more money and make sure it goes into stocks. that doesn’t count either.

  2. jiHymas says:

    Interesting article on inflation perception.

    If you don’t like the Statistics Canada definition of inflation, which one do you like?

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