In 2016 CTH first predicted the intellectual economic disconnect that would arise out of the paradigm shift in economic principles. Initially I called it “the economic third dimension” – SEE HERE.
As time progressed through the second fiscal quarter of 2017 (Jan-March) again, we noted how the Federal Reserve was exactly failing to understand this “third dimension”; the space between Wall Street and Main Street fiscal policy – SEE HERE.
Finally today, for the first time, we see a federal reserve voting official begin to question the underlying economic assumptions of the Fed. Federal Reserve Bank of Chicago President Charles Evans is the first federal official to identify the disconnect between federal economic policy and actual economic outcomes:
WASHINGTON – […] Inflation has run below the Fed’s 2 percent target over the past eight years, Federal Reserve Bank of Chicago President Charles Evans noted.
“This is a serious policy outcome miss,” he said in remarks prepared for a conference in Idaho.
[…] Even as inflation has tumbled this year, Fed officials have brushed it off, indicating that they believe that one-off factors are keeping prices low. Those include cellphone service prices cratering because of carriers bidding to offer unlimited data plans. Fed Chairwoman Janet Yellen and others have suggested that inflation is likely to head back up after those temporary price drops slow overall prices.
“My inflation outlook is not quite as sanguine,” said Evans, setting himself apart from others at the central bank. He added that the Fed needs to hit the 2 percent target “sooner rather than later.”
Evans’ comments are the first sign of a Fed official appearing to reconsider plans to continuing raising interest rates this year. Evans is a voting member of the Fed’s monetary policy committee. He has voted twice this year to increase rates.
But inflation has continued to move lower, testing the Fed’s patience. The Consumer Price Index fell in June to 1.6 percent, the Bureau of Labor Statistics reported Friday.
Fed officials favor rising inflation not for its own sake, but as a sign that the economy is running as well as it could. Predictable 2 percent annual inflation, they believe, allows for businesses and individuals to plan ahead. (read more)
It is not “one-off factors”. The cause of inflationary outcomes not matching Fed predictions, is specifically because we are inside the inverse Maganomic space.
Yeah, forgive me – but I’m feeling a little vindicated after a year where multiple “intellectuals” stated my fundamental outlook on the U.S. economy was a theory too far ‘out there‘ to be real. This ‘out there‘ theory is quickly becoming the ‘right here‘ reality.
As we shared at the beginning of the 3rd quarter (April-June) , I repeat as we begin the 4th quarter (July – Sept).
People may ignore this, but it does not change reality.
A series of recent headline articles [Jan-Feb ’17] – about traditional economic analysts, government and private, perplexed by financial and consumer trends – highlights the disconnect inherent amid those who cannot reset their frame of economic reference.
For 30+ years U.S. economic political policy has been driven by Wall Street interests. STOP. Main Street, the middle-class and the American worker have suffered. STOP. The successful election of Donald Trump, and the execution of his “main street” economic policy agenda, has sledgehammered the prior economic machine into a full seizure an halt. FULL STOP.
It was Albert Einstein who aptly stated:
“The significant problems we have cannot be solved at the same level of thinking with which we created them.”
The same basic principle applies to those who are trying to understand and evaluate current economic activity yet failing to disengage themselves from their historic economic frames of reference.
The mindset framed around thirty years of financial political policy, intended to influence the U.S. economy and created by vested interests who were building out the legislative priorities based on Wall Streets’ best interests, will struggle to understand the new landscape which is entirely formulated to benefit Main Street.
The two economic engines, Main Street and Wall Street, are entirely detached. Time, along with focus only on Wall Street interests, has pushed those two economic engines further apart. No-one is understanding the space between the two engines. The same policies which worked in the immediate past will not work in the immediate future.
The new dimension in U.S. economics is de-emphatic consumer spending on low-turn durable goods (measured by fed), and emphatic consumer spending on high-turn consumable goods (not measured by fed).
Just Keep Watching!
The two economic engines are now in reverse level of importance. Trump economics or “MAGAnomics” focuses on Main Street’s economic engine. The Fed is stuck focusing on the economy through the three-decades-old prism of Wall Street’s economic engine.
We are now in the economic space between both engines. The traditional cause and effect (Fed) is now uncoupled. The administrators of the economy are perplexed; this is unfamiliar terrain.
• Wage rates will be driven up by inflation in ‘non-measured’ high-turn, domestic consumable goods: food, fuel, energy. The Fed does not measure this segment for inflation.
• Inflation, from the perspective of the Fed will appear artificially low because prices on the measured segment will be static: non-domestic durable goods, housing etc. Durable good prices will remain static, and in the short term fall surreptitiously – seemingly unattached to the larger expanding economy.
Until the two economies gain parity – any fed activity, taken as a consequence to their familiar traditional measurements (inflation, interest rates etc.), will have minimal to negligible impact on Main Street.
Home values and local economic factors will be driven by “regional” economies. Period.
The exact same areas of the country which have gone through two decades of economic contraction will now see economic expansion and revitalization. The Fed policy which influences Wall Street was not, and is not, domestic centric. The fed policy is corporate driven, globalist in influence.
If you are making economic decisions, large purchase decisions, over the next year to year-and-a-half, take this into consideration. Large durable goods will become cheaper over the next six months bottoming out sometime around Christmas 2017/Spring 2018.
Auto Sector. – Any auto lease rate in the next 6 months to a year will go up, considerably. Don’t lease a car mid 2017 through all of 2018. Actuarials are trying to gauge the forecast incoming glut of auto inventory due to high lease rates in 2016 (30%+) that will be turned in late ’17 and throughout ’18.
Conversely, late 2017 through 2018/2019 the price of a low mileage used car (former lease) will necessarily plummet. If you are thinking of purchasing a vehicle, wait about six months and then consider a solid used vehicle. You’ll be able to buy a two-year-old low mileage $100k+ high-end luxury vehicle for the same price as a mid-size economy car.
Regional economies will continue to drive home values.
• Areas which benefited from high yield and high rates of return from Wall Street, ie. investment benefactors, will begin economic contraction. The downstream effect on retail and high-end service industries will also be negatively impacted.
• However, industrial areas with affordable housing and infrastructure, which have suffered in the past 20+ years, will see home values increasing as the local economy expands.
National policy (Trump Policy) which benefits Main Street also benefits local economics which are founded in manufacturing, production, and ancillary services. In essence, the Middle-Class.
Those who benefited from high-yield international investment income will see less income. Those who live on savings will see a moderate benefit. However, those living day-to-day and week-to-week on their paychecks will see much more income. Believe it.