A Macro Classic?

Classic_CokeMacro trades come in two flavors, modern and classic. Modern trades are short term, liquidity driven, mean reverting market dislocations. You stare at the screen, pounce, make or lose your money, and exit. Symmetric risk, big premium for risk management and timing. Classic trades are long term, cyclical shifts in the investment landscape. Classic trades take advantage of the myopic nature markets – extrapolating the present. Classic trades have the potential to make big money, because the risks are asymmetric and the herd is against you.

We think we see a macro classic – inflation. Take a look at this study from the St. Louis Fed… https://www.stlouisfed.org/on-the-economy/2016/february/future-oil-price-consistent-inflation-expectations. Current inflation expectations imply a future crude oil price of $0 under a semi-reasonable set of assumptions. Quibble with the model if you like, but you cannot escape the fact that current market pricing anticipate little future inflation. Am I able to predict what will drive future inflation….No. Like the card counter in blackjack, however, the deck sure looks rich.

Certain funds that Mount Lucas manages may or may not, from time to time, have positions which seek to realize an exposure to future inflation.  There is no guarantee that such positions, if established, will be established timely and exited profitably.

The Fed: Think Local Act Global?

Is the Fed the world’s central bank or a domestic institution? As we see it, this is the key question for the Fed at its next meeting. The economic data since the last meeting, looked at in isolation, should lead them to continue hiking the Fed Funds rate – simply put, the unemployment rate now stands at 4.9%, and inflation has made further progress back to the target with core CPI at 2.2%. The charts below show the progress toward the dual mandate. On the employment side we look at the unemployment rate against the NAIRU measure. On the inflation side we use the sticky and flexible price series.

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Retail Prices and China

Regarding the price of retail products. Where are most of them made? China.
Import prices from China FELL 0.3% month over month and are down 1.3% YOY.
See below:
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This speaks to the failure of the Philips curve framework to explain U.S. inflation swings. Inflation rose, 2010, with unemployment at 9%, as the China infrastructure boost lifted Chinese activity. Inflation is now quiescent with 5.5% unemployment, as China is in a bust.