What's with Bernanke jawboning the stock market upwards?

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

M3/M3b is probably as good as any single Fed stat although repos might be a bit better.

So repos would be inclusive/representative of all money supply changes? I guess I am confused ... I though they were just one of several Fed tools for manipulating money supply. Maybe you can clarify?

An Excel sheet is available inside a zip at m3b.zip - I'm honestly not sure what you're looking at. By context, it seems you're looking at a possible correlation between M3 and the FDI? If so, perhaps my CPI predict data would work better?

It depends - are you saying that something other than money supply drives price inflation? If it's money supply, then we should see some correlation between changes in m3b and changes in FDI.

The only reservation I'd have about a CPI forecast is that the CPI is not a good measure of inflation to begin with. You are already familiar with my diatribes on that topic ... and have ventured a few yourself... ;)

[jk]

Re: What's with Bernanke jawboning the stock market upwards?

So repos would be inclusive/representative of all money supply changes? I guess I am confused ... I though they were just one of several Fed tools for manipulating money supply. Maybe you can clarify?



It depends - are you saying that something other than money supply drives price inflation? If it's money supply, then we should see some correlation between changes in m3b and changes in FDI.

The only reservation I'd have about a CPI forecast is that the CPI is not a good measure of inflation to begin with. You are already familiar with my diatribes on that topic ... and have ventured a few yourself... ;)

i just made a comment in another thread that also applies here: you guys talk about money supply without addressing the issue of velocity. [i think, at least i don't recall velocity being discussed.] i don't see how you can discuss money supply quantitatively without bringing in velocity.

[bart]

Re: What's with Bernanke jawboning the stock market upwards?

So repos would be inclusive/representative of all money supply changes? I guess I am confused ... I though they were just one of several Fed tools for manipulating money supply. Maybe you can clarify?

Yes, repos are indeed only one of many tools the Fed has. But as far as trying to locate just one stat that would be a proxy for the entire Fed (which is a bit of a dicey proposition), I do think that repos is a little better than M3. Check out the repo/Dow correlation (with a 41 week lag) for example:

It depends - are you saying that something other than money supply drives price inflation? If it's money supply, then we should see some correlation between changes in m3b and changes in FDI.

Nope - inflation is definitely more money than goods, but there are so many elements to money supply and each has a different lag and effect, and then there's velocity which has almost as many definitions as the word "is", and then we have "fiddling" - basically, its just plain difficult at best to point at just one stat at least with my current level of understanding.

But there is a mild correlation, once a 2 year lag is applied:

The only reservation I'd have about a CPI forecast is that the CPI is not a good measure of inflation to begin with. You are already familiar with my diatribes on that topic ... and have ventured a few yourself... ;)

True... except the elements behind my CPI forecast are based on money supply items like repos and credit instead of BLS BS, plus anti-hedonic etc. adjustments.

[bart]

Re: What's with Bernanke jawboning the stock market upwards?

i just made a comment in another thread that also applies here: you guys talk about money supply without addressing the issue of velocity. [i think, at least i don't recall velocity being discussed.] i don't see how you can discuss money supply quantitatively without bringing in velocity.

I do take velocity into account in many of my algorithms but it hasn't been much of a factor lately... and its also one of those terms that can cause nodding off so I trend to avoid it. I did actually mention it in a very recent post - and I hadn't seen your post at that time... serendipity is a goodness.

Here's a long term view of one definition of it and as you can see, it's been relatively flat for the last few years. Other definitions of velocity are showing similar trends.

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

True... except the elements behind my CPI forecast are based on money supply items like repos and credit instead of BLS BS, plus anti-hedonic etc. adjustments.

Even a correct consumer price index is still not a broad inflation index. Consumer prices are just one segment of the overall economic-financial-monetary system. Remember the FDI does not merely correct for BLS BS, hedonics, etceteras in the official CPI, also captures a world of prices that the CPI does not even attempt to gauge. As a result, it differs from the CPI in two important ways 1) it eliminates the pervasive downward bias in inflation readings, and 2) it responds to changes in inflation much sooner and without the CPI's smoothing effect.

So does your CPI forecast target? Is it a corrected consumer price index or an overall inflation index?

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

Nope - inflation is definitely more money than goods, but there are so many elements to money supply and each has a different lag and effect, and then there's velocity which has almost as many definitions as the word "is", and then we have "fiddling" - basically, its just plain difficult at best to point at just one stat at least with my current level of understanding.

But there is a mild correlation, once a 2 year lag is applied:

This one is probably accidental. Remember an increase in money supply would correspond to a decrease in the FDI. So before looking for correlations, we'd want to invert one or the other. Once that is done, the lag should be more on the order of days or even hours, rather than years. Then considering the reporting lag in monetary stats, it could be virtually coincident or even slightly leading.

[bart]

Re: What's with Bernanke jawboning the stock market upwards?

This one is probably accidental. Remember an increase in money supply would correspond to a decrease in the FDI. So before looking for correlations, we'd want to invert one or the other. Once that is done, the lag should be more on the order of days or even hours, rather than years. Then considering the reporting lag in monetary stats, it could be virtually coincident or even slightly leading.

Its slightly better now, I used the wrong column in my haste - but its still a poor correlation (.19).

[bart]

Re: What's with Bernanke jawboning the stock market upwards?

Even a correct consumer price index is still not a broad inflation index. Consumer prices are just one segment of the overall economic-financial-monetary system. Remember the FDI does not merely correct for BLS BS, hedonics, etceteras in the official CPI, also captures a world of prices that the CPI does not even attempt to gauge. As a result, it differs from the CPI in two important ways 1) it eliminates the pervasive downward bias in inflation readings, and 2) it responds to changes in inflation much sooner and without the CPI's smoothing effect.

So does your CPI forecast target? Is it a corrected consumer price index or an overall inflation index?

Its both, and that's why it doesn't track CPI super well.

Now if I could hack the BLS database and get the raw data... ;-)

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

Its both, and that's why it doesn't track CPI super well.

It's not possible for it to be both. Consumer prices are only one segment of the economy, and therefore no index of consumer prices, even if correctly done, can adequately represent overall inflation.

The idea of identifying consumer price inflation with the whole of inflation is a notion promulgated by Washington and Wall Street establishment media. Don't you remember the 1990's while Greenie et al were busy blowing bubbles and the money supply all while pointing to subdued consumer price action as evidence inflation was tame? You are telling me you buy into that? Have you been out without your headgear?

Think back carefully ...

[bart]

Re: What's with Bernanke jawboning the stock market upwards?

It's not possible for it to be both. Consumer prices are only one segment of the economy, and therefore no index of consumer prices, even if correctly done, can adequately represent overall inflation.

The idea of identifying consumer price inflation with the whole of inflation is a notion promulgated by Washington and Wall Street establishment media. Don't you remember the 1990's while Greenie et al were busy blowing bubbles and the money supply all while pointing to subdued consumer price action as evidence inflation was tame? You are telling me you buy into that? Have you been out without your headgear?

Think back carefully ...

http://www.nowandfutures.com/grins/rimshot.mp3 ;)


But of course it is - CPI & inflation were much closer to the same item from 1913 through roughly the '70s, and then we started to get the KoolAid injections and outright lies.

And of course they never will match - there are way too many variables to take into account. But CPI, up until sometime in the '70s was close enough for horseshoes - and that's what we're both trying to do - correct for the lack of real accuracy or standards as best we can with imperfect data.

I don't think either of us maintain that the various charts are perfect - just better approximations of what is actually happening behind the curtains and BS.

Or maybe you are saying that the FDI is perfect? ;)

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

And of course they never will match - there are way too many variables to take into account. But CPI, up until sometime in the '70s was close enough for horseshoes - and that's what we're both trying to do - correct for the lack of real accuracy or standards as best we can with imperfect data.

I don't think either of us maintain that the various charts are perfect - just better approximations of what is actually happening behind the curtains and BS.

Or maybe you are saying that the FDI is perfect? ;)

Not at all. Only that it is not the same thing as a "better CPI". I'd look to the Williams CPI if I were merely trying to get a more accurate picture of consumer price inflation.

But of course it is - CPI & inflation were much closer to the same item from 1913 through roughly the '70s, and then we started to get the KoolAid injections and outright lies.

There's much more to it than that. Even before the advent of homeowner's equivalent rent and hedonics and such, the CPI and the overall rate of inflation were not the same. They would be only if the only things we ever bought with dollars were groceries and cars and trinkets and stuff. But of course we can also buy things like stocks and bonds with dollars, too, and so if we omit them from all consideration - as Greenspan argued in the late 1990's that we should - then we get a picture of inflation that is severely distorted even beyond BLS BS.

A similar thing happened in the 1920's. The Fed got loose on money and expanded credit. Consumer prices were very well behaved. This is because the price inflation was going into non-consumer items - the financial markets - most prominently stocks. A similar phenomenon occured during the 1960s, and again in the 1990s. In fact you yourself have even noted an inflection in the expansion of the money supply around early 1995, on the cusp of a five-year record-breaking bull run in stock prices. If not there, where do you suppose that inflation went?

This is why we have to resist the Greenspan bubble paradigm and steadfastly remind ourselves that consumer prices represent only one subset of the global price picture and that excess money can go lots of other places too. The mere fact of subdued consumer price inflation - at least three times in the past century - has been used by the Fed to rationalize rampant money and credit expansion. It is important to realize that the CPI is not what it used to be by virtue of having been "managed" downward by various statistical subterfuges, but it is at least as important to realize that consumer prices themselves can be egregiously misleading as to what is happening in the overall inflation picture.

[bart]

Re: What's with Bernanke jawboning the stock market upwards?

Not at all. Only that it is not the same thing as a "better CPI". I'd look to the Williams CPI if I were merely trying to get a more accurate picture of consumer price inflation.

John Williams factors are actually a major element in my CPI/inflation chart. The algorithm has changed and been added to since last year.

I just realized that I haven't linked to the chart either:


The M3-M2 line is my current built in sanity check.

There's much more to it than that. Even before the advent of homeowner's equivalent rent and hedonics and such, the CPI and the overall rate of inflation were not the same. They would be only if the only things we ever bought with dollars were groceries and cars and trinkets and stuff. But of course we can also buy things like stocks and bonds with dollars, too, and so if we omit them from all consideration - as Greenspan argued in the late 1990's that we should - then we get a picture of inflation that is severely distorted even beyond BLS BS.

A similar thing happened in the 1920's. The Fed got loose on money and expanded credit. Consumer prices were very well behaved. This is because the price inflation was going into non-consumer items - the financial markets - most prominently stocks. A similar phenomenon occured during the 1960s, and again in the 1990s. In fact you yourself have even noted an inflection in the expansion of the money supply around early 1995, on the cusp of a five-year record-breaking bull run in stock prices. If not there, where do you suppose that inflation went?

This is why we have to resist the Greenspan bubble paradigm and steadfastly remind ourselves that consumer prices represent only one subset of the global price picture and that excess money can go lots of other places too. The mere fact of subdued consumer price inflation - at least three times in the past century - has been used by the Fed to rationalize rampant money and credit expansion. It is important to realize that the CPI is not what it used to be by virtue of having been "managed" downward by various statistical subterfuges, but it is at least as important to realize that consumer prices themselves can be egregiously misleading as to what is happening in the overall inflation picture.

Yes, and I pretty much agree with all your comments and observations... and that's why I use credit and repos and velocity and M1 and GDP and lags. etc. in my formula. It bypasses all the issues with changes in valuation of different asset classes as well as the basket-of-goods definition difficulties.

Your point about missing inflation in the late '20s is true, and I'd also add that there was missing deflation in the '30s too.

But I submit that when "normal" and non-econ or non-chart nut folk refer to inflation, they're talking about and more interested in the basket-of-goods stuff plus some about assets - and that's what my inflation chart attempts to measure and forecast.
Perhaps I should add another 1-2% to the hybrid adjustment in order to take more of the asset picture into account... but I think I'd even get more of a deer-in-the-headlights reaction than I get now.

For a fuller picture of actual inflation, either your FDI or a combo of my inflation chart plus a bunch of Kentucky windage from the USDX, the gold price, global liquidity, etc. will do the trick.



Do I get any points yet for avoiding being "finned"? ;)

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

John Williams factors are actually a major element in my CPI/inflation chart. The algorithm has changed and been added to since last year.

In case I wasn’t clear, (now that would never happen, right?) I’m not suggesting the FDI as a substitute or competitor to the Williams index in the area of measuring consumer price inflation. William’s index is clearly superior for that, as well as being superior to the official CPI. The FDI is after something else - inflation as a whole.

But I submit that when "normal" and non-econ or non-chart nut folk refer to inflation, they're talking about and more interested in the basket-of-goods stuff …

And that is where they’re missing the picture! And where we have work to do. It just takes far too long for it to register there … by the time it has the trend may already have changed in the other direction. This is what underlies the talk we often hear about the Fed attempting to be "pre-emptive". Despite their stated focus on official inflation readings, these guys know instinctively when the trend has changed. They just have a hard time rationalizing it on the data. The fact is that the inflationary trend generally already has moderated, and they "know" it, but are hard pressed to explain why, as the official inflation stats keep chugging along on their former path.

… plus some about assets...

This part has them totally flummoxed. Alan Greenspan averred in the latter half of the 1990’s that the Fed should not take notice of asset market prices. He has since recanted (since leaving his post, that is!). But they still have no firm quantitative way to work asset prices into their models.

Perhaps I should add another 1-2% to the hybrid adjustment in order to take more of the asset picture into account... but I think I'd even get more of a deer-in-the-headlights reaction than I get now.

It depends on what you’re trying to target. Deciding that is the main thing here. I’d suggest that if you do work in asset prices and it’s really intended to be a measure of overall inflation, you might consider naming it something other than a "CPI predict" because most folks will figure you’re targeting consumer price inflation. As noted, there is a tremendous amount of confusion on just that point because so many have just assumed consumer price inflation is inflation.

This is one of the main reasons for the large divergence between the conventional definition of the term and that insisted upon by those economists to the effect that inflation itself is growth in the money supply. If you cast a wide enough net in measuring price inflation, the gap between those views narrows considerably.

Do I get any points yet for avoiding being "finned"? ;)

Well that's what that crack about the "headgear" was supposed to be … oh well ... and here I thought you were trying to put that free card to use … ;-)

[bart]

Re: What's with Bernanke jawboning the stock market upwards?

In case I wasn’t clear, (now that would never happen, right?) I’m not suggesting the FDI as a substitute or competitor to the Williams index in the area of measuring consumer price inflation. William’s index is clearly superior for that, as well as being superior to the official CPI. The FDI is after something else - inflation as a whole.

Indeed, and I'm glad you mentioned it since they are different items - albeit related like a subset.

And that is where they’re missing the picture! And where we have work to do. It just takes far too long for it to register there … by the time it has the trend may already have changed in the other direction. This is what underlies the talk we often hear about the Fed attempting to be "pre-emptive". Despite their stated focus on official inflation readings, these guys know instinctively when the trend has changed. They just have a hard time rationalizing it on the data. The fact is that the inflationary trend generally already has moderated, and they "know" it, but are hard pressed to explain why, as the official inflation stats keep chugging along on their former path.

Very much so, and not just because politics is involved.
If I was one of the tinfoil hate brigade, I'd probably add a few choice comments and additions too.

This part has them totally flummoxed. Alan Greenspan averred in the latter half of the 1990’s that the Fed should not take notice of asset market prices. He has since recanted (since leaving his post, that is!). But they still have no firm quantitative way to work asset prices into their models.

That must be one of those coincidences I keep hearing about, or is that another Fed conundrum? Its amazing how much more intelligent folk get after leaving the Fed...

It depends on what you’re trying to target. Deciding that is the main thing here. I’d suggest that if you do work in asset prices and it’s really intended to be a measure of overall inflation, you might consider naming it something other than a "CPI predict" because most folks will figure you’re targeting consumer price inflation. As noted, there is a tremendous amount of confusion on just that point because so many have just assumed consumer price inflation is inflation.

This is one of the main reasons for the large divergence between the conventional definition of the term and that insisted upon by those economists to the effect that inflation itself is growth in the money supply. If you cast a wide enough net in measuring price inflation, the gap between those views narrows considerably.

Now you've gone and done it... you made me burrow into my huge Excel model and significantly alter one of the algorithms and then retitle it so that my CPI/inflation prediction chart now has a full inflation rate prediction.

We agree on your money supply observation too, and I suspect for the same reason - the net must be widened enough on what the money supply actually is. Money supply includes a lot more than M1, M2, M3, credit & velocity... and shades of all the DR threads wrangling over what the meaning of inflation really is too.

Well that's what that crack about the "headgear" was supposed to be … oh well ... and here I thought you were trying to put that free card to use … ;-)

There's a free "headgear" protection and anti chart poltergeist in your account now... ;)

[Finster]

Re: What's with Bernanke jawboning the stock market upwards?

Indeed, and I'm glad you mentioned it since they are different items - albeit related like a subset.

Very much so, and not just because politics is involved.
If I was one of the tinfoil hate brigade, I'd probably add a few choice comments and additions too.

That must be one of those coincidences I keep hearing about, or is that another Fed conundrum? Its amazing how much more intelligent folk get after leaving the Fed...

You bet! Borrowing your head gear for a moment, I suspect ol’ Greenie knew full well what he was doing when he cut rates all the way to 1% and held them there. He’d created a monster bubble, a monster bust, and then tried to paper over the bust with inflation. But he knew that his inflation wouldn’t really show up strong in the stats until after he was gone, and his successor would be left with trying to clean up the mess. Ergo, he leaves with his maestro-hood rep intact, and Bernanke gets the blame if he doesn’t magically produce that Goldilocks combo of low inflation and low unemployment.

Now you've gone and done it... you made me burrow into my huge Excel model and significantly alter one of the algorithms and then retitle it so that my CPI/inflation prediction chart now has a full inflation rate prediction.

We agree on your money supply observation too, and I suspect for the same reason - the net must be widened enough on what the money supply actually is. Money supply includes a lot more than M1, M2, M3, credit & velocity... and shades of all the DR threads wrangling over what the meaning of inflation really is too.


There's a free "headgear" protection and anti chart poltergeist in your account now... ;)

An "anti chart poltergeist"???

… hmmm … coming from Bart O Chart, one has to wonder what secret ingredient such a thing might contain …