ebook essays pieces of the puzzle
Thursday, October 4th, 2012
explosive inflation

I had lunch with a former co-worker on Tuesday.  We had a great discussion about many aspects of the business — and touched on inflation briefly.  He told me to go back and look at the period shown above.  His point was that inflation can arrive suddenly.

I agree with him on that.  I’m not a fan of QEx and think it’s silly that the Fed talks about what it will do through 2015 — and even sillier that anyone thinks it could possibly know how it will be conducting monetary policy then.  It wasn’t true in 1913, when the chart above starts and the Fed was created, and it’s not true now.

Then I saw two items yesterday.  A story about what’s happening in South Africa (a trigger can come out of nowhere) and a paper from the New York Fed that references a model (on the top of page three) which raises the possibility of “explosive inflation” in response to the monetary stance and forward guidance of late.

I generally leave the juxtaposition of disparate time periods to others.  And yes, things have changed a bit in the last hundred years (just see the item below) to say nothing of that whole “war to end all wars.”  So why am I presenting this now?

One group of market participants seems to believe that there is a 100% chance that we’ll see a repeat of that sort of move in inflation.  Another group think it’s not possible at all and has followed the Fed’s lead in taking more risk.  The future path of every asset class will be determined by which group is right.  (Chart:  Bloomberg terminal.  Data:  FRED.)

the sounds of the kitchen

Perhaps you’re lucky enough to have eaten at Eleven Madison Park.  My latest essay starts with the sounds of the kitchen there and ends with some thoughts about how the rhythm of the investment industry has changed and perhaps our understanding along with it.