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Inflation: Is the Fed Too Complacent?

Kevin Cook

If you must have a "bond king," I recommend Scott Minerd of Guggenheim over Gross or Gundlach. I've been following his writing and appearances for a little over a year and just about everything he says about the economy and markets makes more sense than the other two.


He called the bond rally from last year's 3% yield on the 10-year Treasury -- twice, both in the summer and in December. It wasn't that he was a big fan of deflation. It was just the way he saw the supply and demand flowing for Treasuries. He obviously nailed it, twice.


Did I listen? Not really. Especially when I heard him talk about the 10-year possibly slipping back toward 2%. I just thought that was next to impossible in a steadily improving economy.


Well now Scott is talking about inflation. And he's worried that the Yellen Fed is too dovish and too complacent to be ready for it when it gets rolling. Here are excerpts from his commentary last week...


U.S. Federal Reserve policymakers are dismissing as "noise" signs that inflation pressure is building, but perhaps they should be listening more closely.


"I am increasingly of the view that the Fed and investors are complacent about inflation. While a broad-based secular increase in inflation is most likely a problem for the next decade, there are a number of technical and cyclical forces working to push consumer prices higher. One technical factor is the one-time 2 percent Medicare payment cut which went into effect in 2013 and temporarily depressed healthcare costs for Medicare recipients. The recent increase in healthcare costs results largely from the year-over-year effects of this one-time cost reduction expiring.


"Another inflation factor at work is shelter. With rental vacancy rates hovering near 13-year lows and new home sales soaring by 18.6 percent to an annualized pace of 504,000 units in May, we can expect a continued rise in shelter costs for the rest of the year and possibly into early 2015. As a result of these technical issues and the cyclical factors associated with the economic expansion and employment growth gathering pace, we are likely to see inflationary pressures continuing to build. It is clear that we have now passed the days of low inflation growth."


I too am complacent about inflation. I have been far more worried about deflation and the risks of the Japanese-style economic death spiral. And that's why I have been a big supporter of the Fed's QE programs.


Watching Bernanke push on the string for years, I have thought "If a few trillion in Fed monetary fire power can't get inflation going then we are in for a long hard battle. But eventually corporations will spend and banks will lend and the economy will hit escape velocity."


But now Mr. Minerd brings us some evidence worth paying attention to (or at least he presents it a way that my brain can grasp). Inflation could be creeping up before that "escape velocity" and that could lead to some trouble down the road (stagflation?) sooner than later.


Below is Scott's "Chart of the Week" with a very interesting model to measure and possibly predict housing inflation. Kudos to Tracey for always keeping tabs on "shelter inflation" as she informs us weekly of real estate trends across the country with both statistics and loaded observations like "Look at how much these idiots are paying for this dump!" It's such a better metric than everyone complaining about how much they spent at the grocery store.



In case this chart is not expandable in this blog, here is the link to Scott's June 25 commentary on the Guggenheim site with a paragraph above it explaining the data in more detail:


The Signal and the Noise


Question of the day: After seeing this "shelter inflation model" from a good bond king, are you any more or less concerned about inflation?

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