Searching for Bobby New-Era
JACKSON HOLE, Wyo. -- The year-on-year rate of increase of the core (excluding food and energy)
Consumer Price Index
fallen by half a percentage point during the past year.
The yield on the bond has
risen by more than a full percentage point over the same period.
Why is that?
Why are bond yields rising so much against such a remarkable price performance?
Against a backdrop of some of the kindest core price increases to hit the tape in three decades?
Is it because not enough folks understand that the Internet is more important than the central bank?
Is it because our central bankers are on the attack against economic growth?
Against asset values -- and the dot-com world in particular?
Against prosperity in general?
Certain segments of the market population will answer Yes to all four of those questions.
Those of us (a) who do not routinely shove things up our noses (b) who do not want someday to become Treasury secretary or (c) whose living does not depend on convincing other people that nothing ever really goes wrong with stocks will answer No to all four of those questions.
We need something a bit less arrogant and populist.
We need something a bit more common-sensical and rigorous.
So try this one on:
Treasuries have been positively bloodied even against a remarkably kind price performance because all the New-Era talk out there is nothing more than that -- and the market knows it. The market knows that there are no more dumptrucks of good luck in Mudville.
A studied look at the board is enough to convince any objective observer that the end game for the New Era crowd is near. Just consider for a moment the lay of the remaining pieces.
The whole New Era argument draws entirely on the performance of the economy between 1996 and now -- a period that's delivered bigger growth increases alongside littler core price increases. Proponents of the New Era contest that price increases have proven kinder and kinder not due to a host of temporary and favorable supply shocks, but rather to a huge technology-driven surge in trend productivity -- one that, because it is structural (and not cyclical) in nature, will keep intact (and perhaps even widen) the big gap that's opened up between price increases and growth rates.
And if you think about it for a few minutes, that's one loooooong thin limb to be going out on.
(a) Keep in mind that the consumer price indices are universally considered to be
Core price increases only really began to accelerate during the year following the end of the 1994 tightening cycle, for example -- and, had the Fed not acted so aggressively (it doubled the funds rate in a year), they would surely have proven materially more problematic.
They hey-it-hasn't-happened-yet mindset is dangerous enough.
If-it-ain't-happened-yet-it-ain't-gonna-happen thinking is riskier still.
(b) Keep in mind that supply shocks have run their course.
The most confusing thing about the New Era guys is that they refuse to acknowledge the fact that the things that helped tremendously on the way down will necessarily hurt big on the way back up.
Take oil prices. They've risen more -- much more -- during the last year than they fell during the prior two.
An even bigger increase over an even shorter period of time: How can you not include that fact in your price forecast?
It's one thing to huff and puff that, well, oil prices definitely won't more than double in a year
(even then, though: what?! you mean to say that cartel members actually cheat on their quotas?!) or to divert attention to the futures market when cash isn't going your way.
It is quite another to not revise up your forecast on such a sour development.
Especially when you couldn't quit revising it down back when things were so sweet.
Likewise, consider the value of the dollar (and import prices).
It rose markedly (and they fell sharply) through the three years ended (roughly) summer 1998.
That is no longer the case; the trends in both the dollar and import prices have since reversed.
Have they yet retraced even a fourth of their prior moves?
Nope. But that isn't the point.
The mere fact that they are no longer doing what they were doing means that yet another source of generous help -- help that contributed to the remarkable price performance we've seen over the last few years -- has dried up completely.
How can you be just as optimistic about the price outlook in light of that fact?
(c) Keep in mind the productivity question.
Has the trend there really surged?
There isn't a lot of evidence to suggest it has.
If productivity really is rising as much as it was in (say) the 1950s, then we certainly ought to see real earnings rising at a pretty smart clip, too. Trouble is, we don't.
Matter of fact, as the table above shows, real earnings have turned in a downright sorry performance this decade.
Why is that?
Why did they fall five times this decade but only once between 1950 and 1969?
Why during this decade did they lag for so long?
And why, if productivity is rising so much, are they decelerating so much this year?
The New Era guys want you to believe they can beat a queen and a rook with a pawn.
It just ain't gonna happen.
And so here we'll extend this courtesy:
Just tip the king over now and we won't torture you later.