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Looking For Inflation In All The Wrong Places

A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, “this is where the light is”.The Streetlight Effect

The drunk in the above story is an idiot, of course. But no more so than modern economists who can’t find inflation because they’re looking only at the part of the economy covered by their government’s Consumer Price Index.

But gradually, grudgingly, a handful of mainstream economists do seem to be figuring out that the soaring value of stocks, bonds, real estate, fine art, collectibles and cryptocurrencies is a legitimate sign of a depreciating currency and future instability. Inflation, in other words. From yesterday’s Morningstar:

Lack of inflation is a global issue

(Morningstar) – The lack of inflation is a global issue. Unemployment is at cyclical lows in the US, Germany, and Japan, yet in each of these countries there is only small evidence that wages are picking up. No doubt globalisation and technology are common factors that have helped constrain wages across countries.

The de-synchronised nature of the recovery until now has also capped inflation in countries whose currencies have appreciated on cyclical outperformance. From here, however, common global uplift should help neutralise some of these inter-country effects, and allow domestic conditions to play out more powerfully.

Central banks have been puzzled by the lack of inflation, but have not stepped away from its management as the primary goal of policy. However, they’ve responded to the way QE’s impact has been much stronger in financial markets than the real economy by making financial conditions a larger part of their thinking, even if they’ve not formalised this in policy frameworks.

With inflation projected to lift and financial markets strong, we expect central banks to continue to gradually tighten.

Year to date, bond yields have drifted lower and curves are flatter, while credit spreads have continued to tighten.

Valuations of fixed-income assets have moved further into expensive territory with few exceptions. Term premium is close to historic lows and credit spreads at post-GFC tights.

Given this backdrop, our process continues to suggest defensive positioning remains appropriate until better value is restored. We see higher inflation and/or a faster pace of policy tightening as possible triggers.

This acknowledgement that soaring asset prices are kind-of-sort-of inflation is definitely progress, though the struggle it took to get there was obviously considerable. A single paragraph stating that asset bubbles constitute an especially destabilizing kind of inflation and therefore caution is advisable going forward would have made the point in a fraction of the time.

But it’s better than nothing. And who knows, maybe it’s the start of a trend.

35 thoughts on "Looking For Inflation In All The Wrong Places"

  1. The economy is made up of the people who make decisions. If course monetary weights distort the fact that asset prices are excluded from the basket of goods that peasures price inflation. The streetlight is on that basket of goods the bottom half of the economy controls. The top half of the economy, maybe 1% of the people, is not being considered when it comes to measured inflation.

    When assets are inflated, they are inflated with the people’s values taken from of the country’s currency, which largely goes unmeasured. Then when defalation occurs, the central banks provide them with even more funds while they gobble up the little guys devastated by interrupted money streams, increasing the concentration of real wealth as their money streams remain secure. This central bank monetary scheme makes cash king, especially durring a crises. Government tries to provide welfare for the rich to keep the economy going and then welfare for the poor to try to pull the economy out of the ashes. But this time it will be the whole world demanding a bailout of some sort, and bankrupt governments will have to default on some of their pension promises.

    When the reset takes place, besure to require the appropiate proportionate reset from the government, the burden to us all.

  2. Thankfully, I live in the People’s Socialist Thugocracy of Illinois, which is losing one person every five minutes, so house prices here are doing NOTHING. Nice work, leftists! Next stop, DEEEEEETROIT! Whoo-hoo!

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