Inflation Mirage: Core Inflation Declines To 1.7% YoY, Real Average Hourly Earnings Decline To 0.7% YoY

Inflation must seem like a mirage to Janet Yellen and The Federal Reserve. And no, it isn’t an oasis either. The US economy can’t seem to find inflation or wage growth despite near full employment (according to the Federal government, that is).

Core CPI YoY less food and energy fell to 1.7%, but it is still higher than core PCE growth YoY of 1.505% (The Fed’s preferred inflation measure).


CPI for shelter YoY fell to 3.26% in July, still 2x core inflation. And 5x hourly wage growth.

US Real Average Hourly Earnings 1982-1984 USD YoY also declined to 0.7% YoY.


Now, if the Federal government included home prices in their inflation calculation, problem solved! Case-Shiller home prices are growing at a steady 5.7% YoY, considerably higher than wage growth.


Here is a breakdown of the headline CPI numbers.

cpi contrib_0

And here is a chart explaining why The Fed keeps saying inflation is around the corner, but never seems to get there.


With emphasis on hot air.


Winter Is Coming? S&P P/E Ratio Near 10 Year High and CAPE Is At Black Friday Levels

Global central bank (including the US Federal Reserve) has been providing massive liquidity to financial markets, paritcularly (in the case of The Federal Reserve) since June 2007.

While some think asset bubbles are hear, former Fed Chair Alan Greenspan thinks there is a bond bubble, but not an equity bubble.

However, the equity market is priced at a pretty heady level. The S&P 500 Forward 12-month P/E ratio is near its high for the last ten years (corresponding to the massive intrustion in financial markets by The Fed).

NYSE margin is near the all-time high (from Doug Short).


And Robert Shiller’s CAPE (cyclically adjusted price-to-earnings ratioratio is about at the same level as Black Tuesday, October 29th 1929.

While Black Tuesday was a memorable event, the more recent crashes were worse ( and financial crisis).

Of course, this doesn’t mean that the equity markets will crash just like the Yosemite Supervolcano isn’t necessarily going to erupt on any given day.

But Winter is Coming.


Inflation? June Core PCE Price Growth Flat At 1.5% YoY (As Personal Income & Spending Growth Remain Near Zero)

June’s report on Core Personal Consumption Expenditure (PCE) Price growth shows no increase (from the upgraded numbers from May). According to the Bureau of Economic Anaysis, June’s Core PCE Price growth remained at 1.5% YoY (and up 0.1% MoM).

Yes, the US economy is still below The Fed’s 2% target for inflation.

Personal Income and Spending in June? No growth in Personal Income and a 0.1% growth in Personal Spending.

Here is The Fed’s Chairman Janet Yellen talking to her Vice Chair Stanley Fischer: “I could have sworn that there was going to be inflation.”

Venezuela’s 2Y Sov Yield Hits 62.30% As Riots Spread During Election

Venezuela is a mess. The Guardian has this article on the sham elections in Venezuela where President Nicolas Maduro claims a victory for his policies, such as 844%.inflation and chronic shortages in this command economy.

Riots are spreading thoughout Venezuela which Maduro claims is excitement over his enlightened economic and monetary policies.

And then there is the problem that the US is weighing sanctions against Venezuela that could severely restrict the OPEC nation’s crude exports and starve its government of hard currency.

(Bloomberg) — U.S. sanctions against Venezuelan officials include a key figure in some of the oil-for-cash deals with China that are central for the survival of Petroleos de Venezuela SA.

Simon Zerpa, vice president of finance for PDVSA, is the only current official of the state-owned oil company among 13 Venezuelan nationals who were sanctioned by President Donald Trump Wednesday. A self-taught diplomat and socialist financier, he’s managing the debt of one of the most distressedborrowers in emerging markets. Zerpa, 33, also helps direct the $45 billion that Venezuela has borrowed from China to boost crude production.

The sanctions come at a time when PDVSA is struggling to make ends meet. Oil production is slumping, despite the world’s largest proved reserves. The company has an upcoming debt payment of $3.2 billion this year, most of it due in October and November. Earlier this month, Zerpa sought to improve communication with investors through invitation-only conference calls, after Goldman Sachs Group Inc. was grilled for buying Venezuelan “hunger bonds” that, according to the opposition, helped to keep president Nicolas Maduro in power.

“It’s a huge blow in terms of new financing to Venezuela,” Alejandro Grisanti, director of the Caracas-based consultancy Ecoanalitica, says by phone. “After all, Zerpa manages all the finances not just for PDVSA but also for the Venezuelan government.”

The result? Venezuela’s 2 year sovereign yield now tops 62%.

Meanwhile, the Venezuela basket (oil) remains depressed relative to neighboring Colombian oil prices.

Here is President Nicolas Maduro claiming that there is nothing to see here in the elections.

LIBOR To Be Phased Out By 2021 ($350 Trillion In Securities At Risk)

The world’s most important reference index, LIBOR, setting the price for $350 trillion in loans, credit and derivative securities, is being phased out by 2021.  UK’s Financial Conduct Authority which regulates Libor, said the index would be phased out and that work would begin for a transition to alternate, and still undetermined, benchmarks by the end of 2021.

The Federal Reserve has already been gearing up for the replacement: last month the Alternative Reference Rates Committee, a group made up of the largest US banks, voted to use a benchmark based on short-term loans known as repurchase agreements or “repo” trades, backed by Treasury securities, to replace U.S. dollar Libor. The new rate is expected to be phased in starting next year, and the group will hold its inaugural meeting in just days, on August 1.

For reference, here is a chart of several short-term rates including the doomed LIBOR  1 month, The Fed Funds Target rate, the EFFECTIVE Fed Funds rate and the USD 1 Month GC Govt Repo rate. In this chart, you can see the problem with LIBOR during the financial crisis.

The last five year track record for several short rate measure illustrates the potential problem with replacing LIBOR with another index. Obviously, The Fed Funds Target Rate has little volatility. The Effective Fed Funds rate is noisy. LIBOR 1 Month is out. Perhaps the Repo rate (the discount interest rate at which a central bank or bank repurchases government securities) is one candidate.

The problem is that the 1 month Reverse Repo rate is more volatile than 1 month LIBOR. And notice in the first chart that Repo (or Reverse Repo) rates had some unsmooth readings on the downside (where LIBOR had some unsmooth readings on the upside).

Since millions of dollars of adjustable-rate mortgages (and CMOs) are indexed to LIBOR, this should represent an interesting transition.

The Heat Is On! Venezuela 10Y Yield Spikes to 30% (2Y Yield at 60%!)

In the immortal words of the late Glenn Frey, “The Heat is on!!”

And its not Arizona-type heat. But protesters outraged at President Nicolas Maduro with threats of a new constitution and staggering inflation. And no toilet paper.

Venezuela’s 10 year sovereign yield just spiked to 30%.

And near 60% at the 2 year mark.

Now that the Dodger’s ace Clayton Kershaw is on injured reserve for a while, here is a possible replacement from Venezuela. I mean, this dude throws fire!

US Treasury 10Y-2Y Slope Declines as Gold Rises

After a yield curve rally in late June that sent the 10Y-2Y slope almost to 100, it has started declining once again and is down to 91.425. But notice that gold rose today and continues to be generally inverse to the Treasury curve slope.

Inflation continues to be under The Fed’s 2% target and has averaged a meager 1.1% under Yellen’s management.

Here is Fed Chair Janet Yellen looking for 2% inflation and not finding it.