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The Queen of Corona


Mama Pajama rolled outta bed ... and she ran to the po-lice station. When the Papa found out he began to shout ... and he started the investigation.

This is what he found.

He saw that

retail sales

fell two-tenths in April (against a 0.9% average increase over the past year). He calculated that they will post an annual second-quarter increase (assuming no change in May and a six-tenths gain in June) of 3.3%. He compared that with the 13.7% first-quarter figure (the strongest showing of the cycle). He wondered if this was it.

He wondered if this was the beginning of the slowdown.

He thought back to the


column that ran here about a week ago. He remembered that it was already clear that there was no way the second quarter could stack up against the first.

He dug up some retail numbers and found that sales have grown even less than 3.3% during five quarters since 1996. He knew that each of those sluggish periods went down as nothing but a wiggle.

He recalled that the pace of income growth has accelerated for two straight quarters to hit a rate stronger than anything he's seen during the past five years ... so he decided that what he had in front of him was most likely just another wiggle.

And he reasoned that policymakers probably came to the same conclusion.


These are the kinds of things we see coming out of some of the big brokerages and investment advisories out there.

Now many forecasters expect a half-point hike. This move would be another mistake. ... Conventional wisdom just doesn't get it. The view that too much prosperity is a bad thing has been around a lot longer than the New Era and it will not go away overnight. Unfortunately, the Fed buys into this view even though most sensitive indicators point to lower, not higher, inflation ahead. ... Driven by bad analysis, the hysteria lives on. Don't buy into it. There is no inflation.

As long as unit labor costs remain so subdued, inflation just isn't going to happen.

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We believe that upcoming data will temper the exuberance of the Fed, leading to another quarter-point move. The impact of Fed tightening is barely visible in the overall data, but anecdotal evidence is beginning to build. Mortgage rates are high, housing is slowing, and some home builders in one Midwest town are in jeopardy. ... The economy does have a great deal of underlying strength, but the Fed is already serious enough to slow it down. Real rates are higher than they have been in 10 years and the markets reflect this. The economy will, too, in the months ahead.

Three notes here.


Normative economics concerns what should be.

Positive economics concerns what is.

The good thing about normative economics is that it goes great with libraries and brandy and cigars. It's social; it promotes conversation and debate.

The bad thing about it is that it will do nothing to help you navigate the sea of real-world markets.

Maybe the central bank should not be worried about a price problem ... yet it is. We must listen when policymakers state that "even though the rate of increase in nominal wages and core measures of inflation do not yet signal that inflation pressures are building, the balance of aggregate demand and sustainable supply today and the distinct possibility that labor and product markets will tighten further suggest an unacceptable risk of overheating and, therefore, higher inflation in the future." Especially when wages and core prices (and future gauges we've

referenced before) do begin to signal precisely that.

Maybe the central bank should not have tightened ... yet it did.

Maybe it should not tighten further ... yet it will. Central bank governors do not spend their time charting the

current tightening episode against earlier ones to illustrate how modest and gradual it's been so far just to flex their graphics muscles.

Like it or not, that's the framework under which we are forced to operate.


The real-rate argument is as tired as it has been wrong.

The director of the Fed's division of research and statistics put it better than anyone could.

One of the notions I come across with some frequency in discussions of the economic outlook is that real (price-adjusted) interest rates are high and a drag on demand.

The proof of the pudding is in the eating, and to date the frequent assertion by Fed critics that monetary policy was too tight has been consistently contradicted by subsequent strength in domestic demand.

The year-on-year pace of final domestic demand clocked in at 8.4% during the first quarter. That went down as the strongest such showing since the mid-1980s.

How could that happen? How could the pace of domestic demand keep accelerating while monetary policy got even tighter?

This is how: Higher real rates are not saying to us that monetary policy has been (or is now) getting tighter. In fact, one need look only at something like the

Goldman Sachs Financial Conditions Index

(which Meyer maps in the speech

referenced above) to confirm that the monetary environment remains unusually stimulative.

What real rates are telling us is that the cycle we've been riding owes very much to an investment boom. Indeed. In a technology-led, higher-growth economy, rising real rates are exactly what we expect to see: They're searching out a new and higher equilibrium level (and you can illustrate this in a simple

IS-LM model by moving the IS curve rightward).

And that's what's way weird about the New Era guys. The ones who scream loudest about the positive impact of technology are the ones who bitch most about the increase in real rates it delivers. Worse still, they then turn around and accuse the Fed of wanting to crush prosperity!!



Some home builders in one Midwest town are in jeopardy?

That's more telling than all the ridiculously strong macro numbers we've seen lately?


Know what that kind of analysis is doing to me?

It's breaking my heart.

Side Dish

I spent all day yesterday negotiating retail and wholesale sales and inventories revisions going back a decade.

Top that.

Giuliani's next announcement?

Heat in five.

I am not gay.

Hillary and I are lovers.

I will drop out ... but only if Rocker steps in.

The Amadou Four? Of course they were guilty.