GaveKal, the esteemed Hong Kong economic consultancy of Anatole Kaletsky and Charles Gave, has been a sort of brain trust for the permabulls over the last few years. But as smart as they are, their post-August permabullish, “all China, all up, all the time” macroeconomic perspective has not panned out. Compared to GaveKal, my medium-term macroeconomic forecast looks downright valuable.
Now that November inflation has risen at a 4.3 percent annual clip (even the much-ridiculed “core CPI” blew past the consensus forecast), the conventional wisdom is that the Fed is up SIV Creek with a broken paddle. As the spread between the housing and renting markets rapidly narrows, a very significant amount of former home equity asset price inflation will force its way onto the Fed’s “home equivalent rent,” further exacerbating inflationary expectations.
So the question now is: will the Fed back off, or will it keep firing away? With the “anonymous” Term Discount Facility, the Fed has effectively saved Citigroup’s reputation from a $49bn SIV torpedo, and allowed Citigroup to “secretly” take out loans from the Fed at very below-market rates (for Citigroup), collateralized against C’s ABS/MBS portfolio, which everybody knows is mostly garbage.
Ironically, the dollar soared, and everything else fell, on the announced inflation numbers. (Interestingly, gold and oil went down in dollar terms by much less than the dollar went up, signifying that both have appreciated in real terms.) Again: “buy the rumor, sell the fact.” The market is betting that the Fed has little choice but to fold.
These extremely conjectural “reads” on central bankers are only part of the reason why Fed-watching is such a losers’ game, so I’m bending a personal rule by engaging in it so promiscuously, but I believe the Mishkin Fed is far too pot-committed to fold at this juncture.
Welcome to the era of the Global Inflation Glut.