Monday, August 31, 2015

"Mark my words, it's just around the corner, you'll see!"

In his latest blog posting, Paul Krugman unfortunately continues to bang his head against the wall. Despite the years of evidence to the contrary, Krugman cites another example of a "serious thinker" prescribing a policy cure based on reasoning that is both flawed and, based on recent history, wrong.

It's more of what we've been hearing for many years now: that QE is undoubtedly inflationary and the Fed needs to preemptively raise interest rates to get ahead of looming runaway inflation. How many times have you heard a right-wing, Keynesian-hating friend utter the words, "Mark my words, it's just around the corner, you'll see!" I can't tell you how many times I've heard this said, that hyper-inflation is upon us (Weimar Republic!) and although we may not see it yet, it will appear fast and furious from out of nowhere -- as if it was an evil force in a horror movie. Is this any way to conduct policy, not based on evidence but rather fear of the boogeyman?

Krugman includes a chart showing what we've been accustomed to seeing: inflation below 2% for nearly the entire post-2008 period. But you don't need to rely on just one CPI chart, as many naysayers often argue key items (bread, eggs, gas, home prices, etc.) are being excluded from the proverbial basket and thus distorting the "true" picture. Never mind that various different versions of a representative basket of goods has typically depicted the same result: very modest inflation.

I've always liked to keep an eye on data from the Billion Prices Project@MIT as another check on inflation. The BPP collects prices on a daily basis from hundreds of online retailers and then calculates inflation statistics, comparing them to the reported CPI. If inflation was a "cooked" number from our government, not to be trusted, I would expect to see some significant deviation between the BPP index and the CPI. However that hasn't been the case as the BPP index and CPI have tracked quite closely over time. So much for that conspiracy theory.

Still not convinced? OK, then I submit this chart:

It's the 5-year breakeven inflation rate, which is the difference between the 5-year Treasury yield (nominal) and the 5-year TIPS yield (real). In short, as described on the St. Louis Fed's web site, it "implies what market participants expect inflation to be in the next 5 years, on average." 

The key aspect of this chart to keep in mind is it reflects the views of "market participants," i.e. investors. It is backed by many billions of actual $$$. I believe as a general rule of thumb that "market participants" are not stupid or easily fooled and thus they would not be projecting sub-2% inflation five years from now if the "non-goosed" CPI (inflation rate) was arguably much higher. 

Again, as with the BPP, the 5-year breakeven chart helps put to rest the conspiracy theories that the "official" reported inflation rate is a cooked figure and artificially understated. On the contrary, it appears inflation has been quite low for years and if anything, based on the FRED chart above, expected inflation has been trending lower since 2006! To borrow from the legendary Wendy's TV commercial, I ask, "Where's the inflation?!"

Well, it's coming, very soon, you'll see.... Mark my words.... Yeesh.

Wednesday, August 26, 2015

The Federal Deficit & Presidents

Hmm, I detect a pattern here:

The deficit tends to shrink (expand) with a Democrat (Republican) in the White House.

Is it any wonder Republicans complain about the deficit when a Democrat is president? Their guy eventually exits, no doubt leaving a huge deficit, and it's now safe for Republicans to complain about said deficit. Of course, such a budget imbalance is never a problem when their guy is president, and recall Dick Cheney once uttered, "deficits don't matter." True dat, they only matter when a Democrat is running things.

Wednesday, August 12, 2015

The Wisconsin Experiment

Yesterday one of my favorite bloggers, Kevin Drum, highlighted a post by Menzie Chinn at Econbrowser. It appears the "Kansas experiment" launched and spearheaded by Governor Brownback has been an unmitigated failure. Menzie compares the economic coincident index of Kansas and the U.S. and clearly shows that the state has trailed the economic trajectory of the overall country. Recall that Brownback's right-wing, free-market policies were supposed to catapult the Kansas economy into high-growth mode as it was finally unshackled from leftist regulations and obstructions. Yawn.

But it occurred to me, Scott Walker entered office in January 2011, the same time as Brownback, how did Wisconsin's economy fare when viewing this same data?

Answer: not much better than Kansas. Whereas the coincident index for Kansas increased by just 10.6% compared to 15.2% for the U.S., Wisconsin enjoyed a better 12.8% gain but still significantly below the national figure. It seems the Koch brothers' hand-picked stooge has been less than successful in energizing Wisconsin's economy -- what a shocker.

I also include data for New Jersey and California over this same time period. The 12.7% rise for NJ puts Christie as worse than Walker, something that could be a surprise if you believed Christie's blather during the debate. 

And as for that bastion of liberalism, California, the state of excessive restrictions, taxes and red tape, how did it fare? Just a whopping 21.1% increase in its coincident index, far ahead of the country's impressive 15.2% gain. Can't say I was surprised. Yawn.

Tuesday, August 11, 2015

HP & Carly

Carly Fiorina had a good debate. She's getting big kudos and accolades for her performance. Good for her. But I would remind, in some respects this sort of post-debate underdog glow is somewhat bittersweet as it often comes with the presumed expectation that the candidate was going to fare much worse and instead pleasantly surprised. Similar to when we applaud a racehorse that went off at 50-1 odds and came in third. Bravo, stellar effort, but in actuality the horse is likely still not very good.

Also, don't forget that Romney beat Obama in debate #1. Nuf said. Debate performances can be extremely temporal.

It's of course not lost on Carly that she's going to need an incisive answer to the inevitable question, "Why did you get fired from Hewlett Packard?" Her chosen defense from a recent interview:

Look, I led Hewlett Packard through a very tough time - the dot-com bust, post-9/11, the worst technology recession in 25 years.  And tough times, unfortunately, requires, sometimes, tough decisions. 
Two things to keep in mind when she tries to get away with this spin:

1) When it comes to stock price performance, there's absolute and relative. Absolute stock price performance measures simply what the stock price did over a period of time. Relative stock price performance compares the stock price versus a relevant index or benchmark.

2) Stocks tend to discount the future by about 6-9 months. In other words, if a stock plunges -20% today, it's doing so as a reflection of expectations for the company over the next 6-9 months.

That said let's take a look at the absolute and relative performance of HP's stock during the time Carly was CEO.

July 1999 - February 2005

Hewlett Packard stock: -54%
S&P 500: -15%
NASDAQ Composite: -27%

During Carly's reign, HP's stock declined by 54%, pretty awful. However, she has attempted to explain this dreadful performance away by reminding us that it was "a very tough time" with "the dot-com bust, post-9/11" (Really? She uses 9/11 as an excuse for her dismissal? Please.) and of course an economic recession. 

In this regard, the relative stock price performance is much more revealing. How did HP's stock price do compared to the S&P 500 and the technology-heavy NASDAQ Composite? Answer: not well. HP's stock underperformed the S&P 500 by a whopping 39% during this time and trailed the NASDAQ Composite by 27%. 

The moral: despite the dot-com bust, a recession and 9/11, the S&P 500 headed south by "just" -15% compared to HP's horrific -54% decline, and the arguably more appropriate NASDAQ Composite dropped by -27%, or just half of HP's percentage loss. Yes, the times then were dismal, but HP's stock still dramatically underperformed relevant benchmarks -- likely a very integral reason for Carly's forced departure.

According to HP's stock price performance, Carly did an exceptionally poor job at running the company. But what did HP's stock price suggest about the company's prospects once Carly exited the scene? I already mentioned that stock prices are discounting mechanisms with today's current stock price typically reflecting investor expectations for the next 6-9 months (approximation). My research shows that Carly left HP on February 8, 2005.

Six months after February 8, 2005        One year after February 8, 2005

Hewlett Packard: +21%                         Hewlett Packard: +59%
S&P 500: +2%                                       S&P 500: +5%
NASDAQ: +4%                                      NASDAQ: +9%

Interesting. After Carly's dismissal, HP's stock was a stellar performer, beating the S&P 500 by 19% and the NASDAQ by 17% in six months. A year later, HP's stock surpassed the S&P 500 by 54% and the NASDAQ by 50% -- wow! It's safe to conclude that investors believed Carly was a significant impediment to HP and the company had a much brighter future with her gone.

Please remember these figures the next time you hear Carly trying to spin her past into a success story. Did she get rich? Oh certainly, to make her go away, HP paid Carly an exit package of somewhere in the neighborhood of $20-$40 million, depending on which news story you want to believe. But was she a successful CEO? That's quite a different question and one that is much more relevant to her campaign narrative.

Friday, August 07, 2015

If this were a stock chart....

Wall Street folks would say the chart below displays a well-defined 100+ year uptrend with a recent bullish break-out. Buy!

Yet we continue to hear from many in the Wall Street camp, namely Republicans, that the chart above is a figment of our imagination, that a steady uptrend in temperature simply does not exist, that it's all a hoax.

Funny, these same people look for these charts all day to buy -- as long as it involves stock prices and not temperature.