Yes, Virginia, You’re Damn Straight It’s A Bubble

You can’t make it any clearer than in the chart below. Wall Street has been stimulated into a monumental asset bubble because that’s what Keynesian central banks do.

They can’t make inflation in one country—stupid as that objective may be—because inflation is rooted in intricate global dynamics that are not controllable by the crude instruments of central bank policy rates or even large-scale bond buying.

Nor can the Fed (or other DM central banks) stimulate real growth in domestic household spending and business investment. Households are stranded at Peak Debt and can’t borrow and spend much more; and the C-suites of corporate America have been turned into financial engineering joints that mainly recycle cash flows and borrowings back to Wall Street rather than invest in the growth of productive assets.

As detailed below, June 2007 marks both the top of the pre-crisis business cycle, and, more importantly, the point where the last vestiges of monetary sanity were abandoned by the Fed and its fellow-traveling central banks around the world.

As to what all the subsequent money printing and rate repression has actually accomplished, the chart leaves little to the imagination. The leading edge of the third great bubble of this century is the tech-heavy NASDAQ 100 (dark line) and it’s up 307% on a peak-to-present basis.

We state it that way for a crucial reason: That huge gain is not from the March 2009 bottom, but from the very tippy-top of the previous housing-based boom cycle!

During that same 12-year period from June 2007 to June 2019, the 16% trimmed mean CPI (yellow line) has risen by 29.5%, which happens to compute out to 1.94% per annum. Or about as close as you please to the Fed’s ritualistic 2.00% inflation target.

So what that means, of course, is that in real terms conservative bank depositors have lost nearly one-third of their pre-existing savings, while stock market speculators gained 215% even after adjusting for CPI inflation during the period.

At the same time, in June 2019 manufacturing output (purple line) was still 1.3% below the June 2007 level, and total industrial production (red line)—which includes the shale boom which caused US oil output to double— is up by only 5%.

That’s right. We’ve had the most massive monetary stimulus in recorded history and the outcome was a pitiful 0.4% per annum growth in the output of the entire US industrial economy—manufacturing, utilities and energy/mining combined.

Moreover, even if you set aside the most frisky precincts of the Wall Street bubble in the tech space, you still have a screaming unsustainability. To wit, even the big cap S&P 500 is up 55% in real terms during that 12-year period or by 10X more than the 5% gain in the industrial production index.

Finally, throw in all the service sectors—-from construction to retail to Pilates studios—-and you still get a punk rate of gain in the real value-added of the entire nonfarm business sector. The latter rose from $11.65 trillion in 2007 to $14.22 trillion in 2018, representing an annualized growth rate of just 1.8%.

For want of doubt, by all historic standards that latter figure is punk, indeed. Thus, during the 2000-2007 peak-to-peak cycle, the growth rate of real nonfarm value added was 2.8% per annum, while during 1990-2000 cycle the rate of gain weighed in at 4.0% per annum.

And, in turn, that followed the 3.7% rate of gain during the 1981-1990 cycle, which happened notwithstanding the set-back of the deep 1982-83 recession.

The fact, is no matter how you slice the data, the tepid expansion of the main street economy since the 2007 peak is as weak as it comes, and is way, way out of sync with the booming gains in the value of financial assets.

Nor is there any mystery about why: In today’s debt-encumbered, excess-capacity ridden globalized economy, nearly all of the monetary stimulus emitted by the central banks remains sequestered in the financial system, especially the hyper-traded stock, bond and derivatives markets.

Pure and simple, therefore, the central banks are printing asset inflation. And then playing a giant game of mis-direction by claiming to be concerned about low-flation in the consumer sector.

As the Fed’s leading Keynesian bonehead repeated again last week:

New York Fed President John Williams said an important lesson of recent research is that when confronted with weakness, policy makers need to “vaccinate the economy and protect it from the more insidious disease of too low inflation.”

As we demonstrate below, the Fed heads are actually making a mountain out of a molehill when it comes to the purported inflation shortfall from target. And the rounding errors difference from target is actually a good thing, not a bad thing, because no economy ever got rich trashing the purchasing power of its currency.

But to call today’s infinitesimally small shortfalls from target an “insidious disease” is, ironically, a testimony to the actual malady, which is the Keynesian groupthink rampant in the Eccles Building and among the other central banks.

To wit, they have invented purely theoretical concepts like r-star or the natural rate of interest, and then finagled regression equations to justify easier and easier money and lower and lower policy rates. For instance two cycles back during the final quarters of the 1990s cycle, the effective funds rate stood at 6.50% in Q4 2000 compared to a 2.50% LTM rate for the 16% trimmed mean CPI.

That is to say, by the eve of the dotcom bust the Fed had at least normalized its policy target—with the real funds rate posting at 4.00%.  Yet the main street economy was no worse for the wear and was still rising at a 4.0%+rate through Q3 2000, even as Fed policy was being normalized.

Likewise, by the next cycle peak in June 2007, the policy rate had been returned to 5.25% compared to an LTM gain of 2.65% for the 16% trimmed mean CPI. So on the eve of the last rate cutting cycle the real fed funds rate stood at a still respectable 2.60%.

Not this time. After being under water (i.e. below the inflation rate) for an incredible 126 months running, the policy rate at June 2019 stood at just 2.38% compared to a LTM inflation rate of 2.14%. That means the inflation-adjusted cost of gambling loans on Wall Street (overnight credit, repo etc.) was just 0.24%.

The great Walter Bagehot had defined the limits of monetary sanity back in the 1860s and 1870s when he said “John Bull can stand many things but he cannot stand two percent”.

In quoting that well understood aphorism at a time when inflation was essentially non-existent, he was essentially saying that even under conditions of economic distress savers wouldn’t accept anything lower than 2%, and that to venture below that threshold would risk up-setting the entire capitalist applecart, which at bottom depends upon rewarding savers in order to accumulate and invest in growth capital.

Needless to say, when you claim that a real interest rate of just 24 basis points is too high—especially after a decade of negative real rates— and is jeopardizing the main street economy, there is only one conclusion to be had. Namely, that you have become utterly detached from economic reality and from all of recorded history and are lost in a la-la land of academic gibberish and obscurantism.

What these definitely not so stable geniuses have actually done is to simply drive the so-called normalized policy rate lower by 410 basis points (purple line) over a two decade period when the underlying inflation rate measured consistently by the relatively stable 16% trimmed CPI (brown line) has weakened by barely 35-45 basis points at the on-set of the easing cycle.

Stated differently, they are just making up the low-flation bogeyman by cherry-picking the data and wildly exaggerating the significance of marginal, very short-term difference in the incoming inflation data.

Self-evidently, the compression of the purple line in the chart below is a 20-year track record of central bank lunacy. They have systematically and increasingly pushed the money market rate below inflation, thereby hyper-fueling Wall Street with ultra-cheap COGS represented by the negative real cost of carry.

We have called this the mother’s milk of speculation. Now they are fixing to goose a mega-bubble generated over the course of the three cycles shown below by inviting speculators to indulge in still another round of gorging at the monetary teats.

In this context, it is more than obvious that the talking heads of bubblevision and the financial press have become vicarious imbibers from the monetary mammary glands, as well.

The Wall Street Journal is especially shameless and the title of this morning’s big story by Fed shill Nick Timiraos tells you all you need to know:

“Why The Fed Is Cutting Rates When the Economy Looks Good”.

What you really need to know is that the Fed is utterly lost in a puzzle palace of Keynesian academic gobbledygook which can lead to only one thing: A further inflation of the today’s egregious asset bubbles and then a thundering collapse from which there will be no respite for years to come.

Today, officials worry that inflation pressures remain too weak, not too strong. This development implies that the so-called neutral rate level that neither stimulates nor curbs economic growth is lower than in the past. And lower rates leave the Fed less space to cut them to combat a slowdown.

Mr. Powell told lawmakers this month he is worried about an “unhealthy dynamic” in which “lower expected inflation gets baked into interest rates, which means lower interest rates, which means less room for the central bank to react” to downturns.

To avoid this trap, Fed officials say they need to fight harder to raise inflation now, when the economy is good. “We’ve seen it in Japan. We’re now seeing it in Europe,” said Mr. Powell. “That road is hard to get off.”

The Fed targets 2% inflation as a sign of healthy growth across the economy but has failed to convincingly reach the goal since formally adopting it in 2012.


We checked out seven different ways they measure general consumer inflation. None of them are perfect and all tend to understate the true increase in the price level owing to utterly arbitrary gimmicks like hedonic adjustments, which are supposed to measure the change in the quality, function and value of goods over time.

Here’s the spoiler alert with respect to all of these seven measures of the general price level. In the context of dynamic capitalist commerce, the size, shape, quality, durability, utility, value etc. of every single good and service is constantly changing. That’s what capitalists do in response to competition, innovation and changing consumers demands and preferences, among a multiplicity of other economic drivers.

So the legions of bureaucrats at the Federal government statistical agencies working on “hedonics” are simply fiddling with a few needles in a massive haystack. That central bankers would even rely on the resultant capricious measures, which have an inherent downward bias, is bad enough. But to pleasure Wall Street with ever cheaper money owing to alleged shortfalls to the second decimal place is flat-out insane.

As it happened, the leading proponents of the low-flation canard at the Fed have been there since the 2.00% inflation target was officially adopted in January 2012. John Williams is a Fed lifer, for example, and Powell was appointed shortly thereafter.

In any event, here are the seven inflation metrics and their 7-year CAGR since inflation targeting was adopted:

  • Regular CPI (1.60%);
  • CPI less food and energy(1.95%);
  • 16% trimmed mean CPI (1.94%);
  • PCE deflator (1.34%);
  • PCE deflator for services (2.30%);
  • PCE deflator less food and energy (1.68%); and
  • Sticky price CPI (2.25%).

As it happens, the average annualized inflation rate for the seven measures is 1.86% over the last seven years and virtually dead-on 2.00% during the last 12 months.

Moreover, it is very evident that the deflators with the lowest readings have the highest weighting of volatile commodity and manufactured goods that are traded in global commerce.

So for all practical purposes we have 2.00% inflation as shown in the chart below for so-called sticky price items that are less sensitive to global trade cycles and the relentless decline of labor-intensive manufactured goods fostered by the China Price.

After all, there is almost nothing that the Fed can do about the medium-term price of oil or the relentless drive of global manufacturing and supply chain firms to find lower labor and production costs.

Needless to say, you don’t need an economic PhD to recognize that low-flation is a convenient boogeyman  for Keynesian central bankers who are desperately fearful of the speculative monster they have created on Wall Street and need an convenient theory to justify pleasuring their captors.

So after the overwhelming demonstration during the past 10 years that Keynesian central banking under current global conditions produces only asset bubbles, not main street growth and real sustainable wealth, these fools are about ready to double-down again.

So it can be well and truly said: It will not be long now before the big one finally blows.