|When A Great Deflationary Bear Starts Turning Inflationary|
|ZeroHedge, 02/04/2013 (traduire en Français )|
Rosenberg : What if the Fed is operating under a false presumption that the CBO's estimate of the output gap is accurate at 6%? And what if the pace of job creation of the past three months is the new normal and that the average pace of the cycle to date is yesterday's story? Well, that would mean that we get to the 6.5% unemployment rate — assuming that the participation rate continues to behave in the manner it has over the past few months — by early 2014. And unless the Fed changes the goal posts again, that would mark the end to this period of ultra-accommodation — aimed at monetizing debts for borrowers and generating asset inflation for risk-toking investors.
If the output gap is actually closer to 2% or 3%, which is quite conceivable, actually, then we are talking about an equilibrium Taylor-based funds rate of 0% — not the de facto -2% that the Fed is targeting via its unconventional easing experiment — and as such, maybe adding more securities to its balance sheet is providing too much juice to the system and risks building an inflationary process in the future.
I am not totally changing my view and l am probably way too early as I am talking for the first time in a long time about inflation. I am only detecting some tectonic shifts. Productivity waning. Wages on the rise. This means rising unit labour costs which in turn have their own correlation with inflation — like an 87% correlation (and 84% with the core CPI rate). As a long-term bond and income bull, I am not about to throw in the towel. But to reiterate, I am no longer in this profession of identifying probabilities, in the same comfort zone as I once was. Stay tuned as my thoughts evolve on this file.
And this of course is the Fed endgame: there are tens of trillions in excess debt that can only be inflated away (absent an outright default) and the Fed, as is to be expected, demands inflation, and will get inflation one way or another: whether supply-push, demand-pull, or outright currency obliteration. The problem then will be when does the Fed admit and acknowledge that inflation has set in (besides the obvious bubbles in equity, credit and real estate which Bernanke and Company are so unable to notice in real time). How much longer after inflation has set in does the Fed continue injecting tens of billions in liquidity each month, which is the only reason the stock market has levitated as it has? But the biggest question is what happens if and when Bernanke, like Rosenberg, finally sees the light and says no more to the liquidity Kool-Aid... or even if that will ever happen?
Because if Rosenberg is right, and he certainly agrees with us that achieving a 6.5% unemployment rate with labor costs already rising is virtually impossible driven solely by rising risk asset prices in the current regime, a major regime change is just around the corner.