The US MAY not hike for years. Seriously.
If we head into a recession before they hike (and I have that as a 75% chance now) they will not hike for years
you are still on target, mish...
don't let the short term "inflation" resulting from the stampede to china (creating yet MORE capacity) cause you to think otherwise..the supply shock will accelerate.
2000wave.com
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The Over-Supply Meets Falling Demand Curve
We are going to look at one more somewhat lengthy but important quote from Doug Greenig of Greenwich Capital Markets. Remember your Economics 101? The old supply and demand curves, which show us that price is a function of supply and demand? The point at which supply meets demand is the current price. If demand increases, the entire demand curve moves and prices rise. If supply increases, then in theory prices go down. Now, don't let the economic jargon of the first paragraph slow you down if you are not familiar with supply demand curves. What Greenig is trying to show us is that inflation is not knocking at our door. At the end of this, we will draw some conclusions, I promise.
"The dynamics of the aggregate supply and demand curves tell the economic story concisely. The supply curve is shifting to the right from productivity gains and access to a larger, better capitalized global labor pool. This means that output will be rising and prices will be falling, with a thud or perhaps a splat. The shift of production to low-wage countries means, further, that the aggregate demand curve (in high-wage countries) is shifting to the left. This mitigates the output gain and causes even lower prices. The growth picture is uncertain, but the inflation picture is not: disinflation, even deflation, is the order of the day. Despite the Fed's efforts to stimulate demand, private sector wage and salary disbursements are actually down 1% in real terms since 2001. Inflation continues to fall. The Fed has thus been hard-pressed to avoid outright deflation.
"Disinflation has not been limited to the U.S. Rather, a long-term disinflationary trend has been observed all over the world, as the logic of my argument applies quite generally. An interesting paper (http://www.boj.or.jp/en/ronbun/03/ron0306a.htm) by economists at the Bank of Japan evaluates several competing hypotheses for this global phenomenon:
1) a cyclical demand shock
2) a productivity shock (i.e. information technology)
3) a supply shock caused by increased capacity in emerging economies (e.g. China)
4) the soaring genius of Alan Greenspan, which has driven inflation, vermin-like, from the face of the earth
"A vector auto-regression model is estimated, and the authors conclude that the supply shock is the dominant factor cutting inflation in the U.S., and elsewhere. They also note that Japan's more serious deflation has been exacerbated by the various rigidities and inefficiencies in that economy.
"It is instructive to focus on two economies - the largest in one case, and the most energetic in the other. The U.S. consumes, and China produces, while an inflexible exchange rate promotes a persistent trade imbalance. Not only does China have very low wages, and some 300 million unemployed people, but the currency is undervalued. Thus, Chinese products remain extraordinarily cheap, and China garners enormous dollar reserves, which are used to purchase USD bonds and fancy bottles of VSOP Cognac (which are displayed like religious idols in many middle-class homes.) The effect is to keep interest rates 'artificially' low. Meanwhile, the Fed must fight tepid demand (as jobs are exported, or lost to the IT'd [information technology and the internet] away) with the main tool at its disposal: the Federal Funds rate. In the U.S., a disinflationary supply shock is thus accompanied therefore by extremely low interest rates. In China, meanwhile, there is an investment and an asset bubble --- which is a major force for global growth.
"One should not assume that this is a pessimistic perspective, just a disinflationary one. Global living standards are on the rise, Americans get to consume, larva-like (http://www.kyoto.zaq.ne.jp/dkaty602/museum/112.html), beyond their collective means, and a deluge of cheap goods enhances purchasing power everywhere. The trends I have discussed remain intact, and we are surely in an early inning of the supply shock, and of the disinflationary pressure. In the U.S., wages will be softer and jobs scarcer than a cyclical analysis would predict.
"The odds favor a continuation of monetary accommodation by the Fed as far as the eye can see. Given this macro backdrop, traders and investors, like the characters of an Ang Lee movie, would be well advised to come to grips with monotony. Trading in anticipation of an exciting change in rates or spreads will be counterproductive: the market may be volatile over a narrow range, but the conditions for a big shift (viz. inflation, or even massive job growth) just aren't going to materialize. If the economy couldn't produce inflation in the boom times of the late 90's, how will it do so now? When the market figures this out, rates are liable to go lower, and spreads tighter." |
