Weekend special: What happens when you hit the panic button and stick your currency in the toaster?

Yesterday's University of Michigan survey was a remarkable piece of data, and Macro Man could not let it pass without comment. The headline reading was the lowest since 1980, providing further evidence of the emergence of a consumer recession, whatever the retail sales figures might say. But the truly remarkable aspect of the data was the sharp rise in consumers' inflation expectations; to Macro Man's mind, this is an entirely logical outcome when a central banks decides to abuse its currency.

Regular readers will recall that when the Fed cut 50 bps in September, Macro Man opined that the dollar was toast. When BB and co. slashed rates by 75bps when the stock market got Kerviel'ed, it seemed like they were hitting the panic button. And what's happened since then? Median one year inflation expectations have rocketed from 3.1% to 5.2%. Sadly, Bloomberg doesn't have historical data for average 12 month inflation expectations; those are now a resounding 7%!!! It seems as if not everyone is living in the Fed's hedonically and seasonally adjusted, core goods world.

The rise in inflation expectations is all the more remarkable when put into historical context; they are now the highest since February 1982. Now, just because you expect higher inflation and demand higher wages doesn't mean you'll get 'em, especially in the context of an incipient recession. But with the balance of probability favouring a Democratic sweep come November, what odds that there emerges a legislative response to the juxtaposition of near-record corporate profits as a % of GDP along with stagnant/negative real wage growth?
Macro Man has long believed that inflation would be the straw that broke the Bretton Woods II camel's back; what's interesting is that the inflationary feedback mechanism is hurting not only those economies that are BWII participants, but the anchor itself, via inflation.

Sadly, we still appear to be a long way away from allowing common senses to prevail amongst the BWII peggers; far better to send the world into an inflationary spiral than allow a few currency punters to make money speculating!
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Anonymous
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May 17, 2008 at 6:41 PM ×

why can't you just spell out what you are saying?????????????

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Anonymous
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May 17, 2008 at 6:41 PM ×

what the F&^% do you think this means???????

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Mr. Prop
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May 17, 2008 at 9:40 PM ×

Apparently, even those places where they did not hit the panic button, and their respective currencies steered clear of the toaster are facing similar inflation pressures. The diffiulty is disentangling what is cyclical, what is secular,what is the dark side of globalization and what is just down to those misguided minions who are pouring 250bn into commdodity investments after prices have gone parabolic.

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Mr. Prop
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May 17, 2008 at 9:45 PM ×

I cannot get Arthur Okun out of my mind. Do you you remember him?

Misery Index (8.94) = Unemployment rate (5) + Inflation rate (3.94)

It is a 1970s renaissance. Next thing you know bell-bottoms will make a comeback...

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Macro Man
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May 17, 2008 at 10:00 PM ×

Baby, I got my polyester leisure suit on and the Bee Gees pumpin' on the stereo! In seriousness, I gotta think that the consumer confidence data tells you that the hedonically-adjutsed, birth/death modelled misery index on ~9 is, in actuality, probably quite a bit higher.

Is your consumption basket rising at 3.7% y/y, like the ONS claims? I know mine's going up a helluva lot faster...

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D
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May 17, 2008 at 11:37 PM ×

I don't think anyone expected inflation expectations to accelerate as quickly as they have. The stock market doesn't want to bubble, bonds are in a bubble, and the real estate bubble continues to under-perform their models...money finds its way into commodities which, for the time being, still have fundamental demand.

HR execs/consultants have also gotten wise and we aren't seeing the mass layoffs. The new trend is to cut everyone's hours or a non-paid holiday (Chrysler 2 weeks off company wide in July). Who wants to pay unemployment benefits anyway?

The modern B-school gives an education in gaming the system, rather than improving the system. I hope it blows up before the November elections just so there is hell to pay for the culpable parties. This isn't Sim City, there are real lives around the world that are being impacted.

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Anonymous
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May 18, 2008 at 3:52 PM ×

d says, "I don't think anyone expected inflation expectations to accelerate as quickly as they have."

Ah, yes. "Hoocoodanode?", as Tanta on Calculated Risk says.

The larger mystery is why inflation has been so little discussed, when historically it's a known war-related risk. Inflation expectations haven't risen as fast as risk because the media haven't been doing their jobs explaining what happens when you blow $3T and make no provisions for paying for it.

MacroMan, as for currency punters having their day, wait until after the election, when there is no longer any need to preserve the Boy Emperor's illusion of a Happy Kingdom.

--Charles of MercuryRising
www.phoenixwoman.wordpress.com

Charles of MercuryRising

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Anonymous
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May 18, 2008 at 4:28 PM ×

Mr. prop, it is my pleasure (regret?) to inform you that bell-bottoms are already making a comeback.

http://bagnewsnotes.typepad.com/bagnews/images/alanchin-hillary-b1.jpg

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Anonymous
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May 18, 2008 at 4:33 PM ×

Bah, the URL was cut off.

http://bagnewsnotes.typepad.com/bagnews/images
/alanchin-hillary-b1.jpg

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D
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May 19, 2008 at 3:06 AM ×

The inflation expectations reaction shouldn't have been a surprise to the bankers...the entire commodity sector had already managed a healthy run. It just goes to show you how highly they think of themselves and the weight of their words...

"hubris"

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"Cassandra"
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May 19, 2008 at 3:07 AM ×

You sound like you feel as I used to feel about two years ago. Keep writing....it eventually wears off. The sad thing is that there is little joy in being right, for the absurdity of it all far outweighs any psychic and material benefit from parochial profit.

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D
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May 19, 2008 at 1:04 PM ×

If that was directed to myself, I have no idea how you conjured up that conclusion. It sounds like you missed the trade...don't worry, there's another bus coming.

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Anonymous
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May 19, 2008 at 7:19 PM ×

Hi MM, not that i wanna argue about inflation being a problem all over but a colleague passed on an interesting chart on Friday: UoM 1y inflation expectations vs. national avg gasoline price and let me tell you that the correlation was striking i.e. suggesting that to most the inflation expectations are all about gas...
Cheers,
Bitr

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