The biggest risk to the nascent U.S. economic recovery isn't Europe or China, but a bunch of old-timers making policy decisions based on what was happening 30 years ago. According to Conor Sen of Minyanville.com, if the Fed could get over its irrational fear of inflation, America could finally see some lasting improvement.
"Inflation is very closely tied to wage rates," Sen notes in the attached clip. "Until we get real wage growth or we have a shortness of capacity in the economy inflation is going to be kicking around 2%."
The official rate of inflation is based on published CPI, a notoriously flawed measure produced by the government. By most accounts CPI understates what is going on in the real economy, most famously by removing food and energy from what's classified as "core" inflation. According to government math, core inflation is 0.1% and the all-in figure over the last 12 months is 2.9%. Not low but far from extreme given the zombie recovery.
While acknowledging the volatility of what Americans pay for what we consume, Sen thinks such items are outside the Fed's purview. "It's not the Fed's job to manage food and energy when a lot of (those prices) are set in the world markets and are outside of their control," he states.
Sen says if the Fed were to convincingly remove the view that every positive data point gets us closer to a rate hike, it would improve investor psychology and expectations; two key drivers to real economic improvement.
Further, the housing recovery could pick up steam, corporations would put money to work, and banks would loan more freely if they believed Fed Chairman Bernanke's vow to be keep rates near zero until 2014.
As it stands, yields on Treasuries are ramping higher and, according to Sen, Fed Fund Futures are betting on a 50-basis point hike in rates before the end of 2013. Sen says this skepticism is due, in part, to Fed being run by people who came of age in the 1970's when inflation was destroying the economy. This age bias blinds officials to data suggesting to Sen that the inflation bogeyman doesn't figure to be a problem in the U.S. for the next 12 - 18 months, at the earliest.
If Sen had his way and the Fed kept rates where they are, the winners would be "anyone starting a business." He also thinks seniors would be the counter-intuitive beneficiaries. While fixed-rate savings pay virtually nothing, a dead economy will eventually make it impossible for entitlements to remain as they are. In other words seniors are damned if rates stay where they are but really damned if the Fed hikes too soon.
"Bernanke's very data dependent," he notes. The data is improving which means rates are going higher. That being the case, the winning plays are shorting the bond market and buying the banks, just like the ancient playbook suggests.