The FT has launched a new email alert on hedge funds and markets today. In the launch mail it said this:
Last week was a doozy. The previous week's lousy jobs report (economy cool, good for markets because loose monetary policy is more likely) was a set-up for Wednesday's breakout inflation report (hot, bad, tight). It then turned into The Week We All Worried Even More About Inflation.
And in an instant I understood exactly why we are having so many reports on inflation expectations at the moment when the real prospects for it arising (most especially now the Indian variant of Covid appears rampant) looks to be very low indeed. The fact is that markets - and most especially hedge funds - survive on market turmoil.
Short term speculative profits, made by exploiting small price differences within and between markets, are one of the ways in which hedge funds make profit. Another is to short shares that they think might move in price as a result of market rumours, often using shares that they borrow from pension funds for this precise purpose.
The result is that anything that creates price volatility is good for hedge funds. They need that volatility to get the opportunity to speculate. And the moment you realise that you get all the explanation you require for the current speculation on inflation. The uncertainty that this speculation is meant to generate creates variable market pricing, whether there is any justification for the rumours or not. And hedge funds almost invariably win from that.
So, is there inflation risk at present? I still do not think so, a short term possible burst when the real markets of the world actually reopen (if they ever do in the way that they once existed) apart. Thereafter I see no reason for inflation expectation. Money creation will certainly not be a cause.
In that case, why the rumours? Because it pays some in the financial markets to create them; the FT included, I suspect.
Little happens by absolute chance in financial markets. Rumours always have a source. The motive is usually profit. And that is precisely what is true in this case. But that does not mean that the rumours are true. It just means that there are short term speculative gains to be made whilst they last.
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What was the inflation number, out of interest?
Isn’t the reason that we are having so many reports on inflation expectations at the moment because of how they have moved recently, and the economic factors driving it? You say the prospects for inflation rising are low. On what basis and evidence are you saying this?
You are also claiming that hedge funds are paying people to start rumors about inflation. This sounds like one of those ridiculous conspiracy theories that float around the internet, unless of course you have evidence for it.
There are thousands of financial institutions out there with good economic teams. They won’t be investing based on rumors started by anyone, or on some article in the FT. They will have done their own research and compared it to similar from lots of banks and economic forecasters. Could just be that there are concerns about inflation because of massive government spending and unprecedented increases in the money supply.
You do know how inflation numbers are calculated I assume?
And that recent change was due to changes in assumptions made?
I do know how inflation numbers are calculated actually. You haven’t answered my questions though. Which inflation number are we talking about here and what was it?
Inflation numbers are backward looking. There is no forecasting for inflation releases. So what assumptions are you talking about?
Most importantly though, could you tell us what evidence you have or research you have done to show that inflation isn’t going to go higher? That and the evidence you have that shows hedge funds are behind these so-called rumors?
Financial markets as a whole are pretty convinced that there is significant risk to the upside in inflation thanks to massive government spending and money supply huge increases in money supply. You can already see price increases across the board – some of them (commodities, housing, etc) which are dramatic.
You aren’t exactly well known in financial markets, and your opinions aren’t going to be taken at face value without some form of evidence to back them up. Care to share that?
Read my blogs and videos on the issue
And I use judgement
That is all economists can use re the future
But what I can say is you are not objective. The word massive fir necessary government spending gives away a hopeless and naive bias in your thinking that predisposes you to discredited economic models
Judgement? That really the best you have to offer?
Other people would call it guessing. Especially when your judgement isn’t without bias, and has shown to be faulty in the past judging from what I read on google when searching you.
Either way, economists have a lot more than judgement to go on when predicting the future. It’s called data. Complex economic models. Simulations.
I think you make the claim that judgement is the only thing people can use because in reality you don’t have any model or evidence for your forecast, so it’s easier to just pluck one out the air. Also shows just about how much economics you know.
We know that wages are going up, commodities are dramatically increasing in price, house prices are going up and the money supply is going up. Historically, this has meant that inflation is going up as well – which we already know it is.
You can’t even tell me what inflation number you or the FT article are talking about.
“The word massive fir necessary government spending gives away a hopeless and naive bias in your thinking that predisposes you to discredited economic models”
So what would you call a government running the size of deficits and spending plans that the US and UK are currently running? Small?
Or the biggest peacetime spending commitments, by far, ever?
Tell you what.
You use your judgement and give me a figure roughly where you think inflation will peak. We can then compare that to where inflation will actually go. You’re an economics expert, so surely you must have an idea, and be willing to stand by your “judgement”?
Surely?
I know my judgement is faulty
It’s true
I just called the 2008 crisis
And warned there would be another by 2020 that would require massive QE in 2015 – although I could not be sure why, I admit
Bu8t what the heck?
How many of your people did that? Do you remember the Queen asking why they missed 2008?
Ho many forecast QE use?
I think I can live with my faulty judgement
I just search your blog back past the start of the 2008 crisis.
This first time you mention any crisis is well after it started. So much for you power of prediction.
Please feel free to link to the article where you predict the 2008 crisis and it’s causes in case I missed it, but as far as I can tell your powers of prediction revolve mostly around hindsight.
It’s a bit scary that you are claiming to have predicted the crisis when in fact you didn’t, by the way.
And since, it looks like you have predicted another financial crisis every single year, without exception. So you’ve finally been right, after being wrong…..11 times.
“I think I can live with my faulty judgement”
Judging by what you have said here, and a hilarious post you wrote about bonds (saying they are a great investment – anyone who followed your advice has lost money and missed out on a huge equity rally. Good job.) I think we can all be thankful that we don’t have to live with your faulty judgement.
I was a co-author of the Green New Deal report that anticipated the crisis
Please ignore the evidence but don’t troll here
The Green New Deal Group’s first publication was in July 2008.
By this point the great financial crisis was well underway.
How in that case did you author a Green New Deal report that anticipated the crisis?
You think working on it from 2007 was a chance?
Why don’t you get a life?
Kieren, you say “You are also claiming that hedge funds are paying people to start rumors about inflation” – where does Mr. Murphy make that claim?
Perhaps you’re referring to his statement “In that case, why the rumours? Because it pays some in the financial markets to create them; the FT included, I suspect.” – in which case, re-read it.
BR, Jon
The last CPI print in the US was 4.2%, released by the Bureau of Labor Statistics. This is fact, not rumour. It would have been closer to 8% if they had used house prices rather than owner equivalent rent.
So what is more likely to have caused this real surge in inflation?
Hedge funds starting rumours (and given most hedge funds are net long the markets, this wouldn’t suit them anyway) or the Biden government printing and spending monumental amounts of money? Something like 15% of GDP.
I mean, printing money and promising to print even more, affecting inflation and inflation expectations going forward. Who’d have thought it.
Reappraising the contribution of the public sector to GDP during the recession?
There are apparent supply-chain issues related to the pandemic causing the uptick (“Who would have thought it?”); affecting for example used cars and supply-chain problems in chip production for the automotive industry arising directly from the pandemic. These are quite understandable trends in mass public markets after a long-term lockdown. These will unwind and are not permanent; all of which is widely known.
This is simply a matter of examining the nature of the vector that determined the perspective you selected.
I agree
And their inflationary impact is also temporary
Building supplies have dried up and prices have increased, apparently doubled for some items. Plaster, soft wood, steel and tiles are all suffering. Covid, Brexit and the Suez canal problem are blamed but the prices have increased.
If there is a spending boom soon, that would not be helpful.
Wouldn’t a financial transaction tax cut this speculative activity by simply making the activity uneconomic ?
The depends on its design and rate
As long as there is “spare capacity” in the economy such as unemployment, empty shops, offices, warehouses, factories, etc inflationary pressures will stay low. Though there are large reserves of savings built up over the pandemic this is unlikely to result in a consumer-led boom as caution will be the watchword for both households and companies.
In the longer term (10 years?), there may become shortages of certain resources needed for the transition to a carbon-free economy such as specific metals and minerals becoming in short supply. Also skills shortages in various technical areas.
Why do we continue to permit short selling, even during the pandemic crisis? I have an interest, of course. As a private investor I am always long on stocks.
Short selling is done for only to manipulate the market for a profit for the short sellers. It has a destabilising effect on markets. There are many other market manipulation practices that constitute criminal offences. Why not short selling?
Stock markets have been disconnected from economic “fundamentals” for a long time if indeed there ever was a connection. The prices of stocks are driven by the amount of surplus cash floating about and needing a place to go. The thing that drives where that cash goes is “news”, rumour and misdirection. Stock prices have little to do with actual profit and dividend payments but on extracting value from those participating in the ebb and flow of funds into the system. Some win, many lose. What participants want is to get people to trade because without trading those with knowledge can’t capture the cash. By putting out stories that spook participants those with greater knowledge of the system can win.
The inflation “news” takes its cue from one side of the equation-that of the state putting vast sums of money into the system. The other side-that large sums were taken out of the system by the pandemic through repayment of debt and the lack of new private debt is ignored.
When supply crashed the inflation hawks should have seen inflation increase because there were fewer products but still large sums of money left in the system which the state supplied to keep people alive. The competition for those goods should have seen those prices rise. To be fair prices of assets – property and stocks – did go up but not general prices. There is no real reason to see significant and sustained increases in general prices now.
There is a really interesting issue here. Neoliberalism lives off the proposition that what markets need is “certainty”, when quite clearly “innovation” and competition depend principally on uncertainty; if this was not true no cold-starts would ever emerge to eclipse the established market leaders; think of a comparison between the fates of Apple, Amazon, Facebook, Tesla, and then General Motors, US Steel – or Enron. Certainty is merely what the established market leaders (the aspirational monopolists of Neoliberalism) seek to protect their hegemony; a permanent state of uncertainty that is the end-game of an inherent Neoliberal paradox.
Turmoil is agreat deal more destabilising than mere uncertainty, and it potentially creates even greater unknowable changes in its wake. Turmoil does not fit with Neoliberal theory, but it is an inevitable consequence of its application; because Neoliberalism cannot cope with its own inescapable flaws.
What Neo-liberalism calls ‘certainty’ is the stuff they can do with out – unionised labour, regulation, workers rights and conditions and subsidies for new market entrants, barriers to moving money around internationally. They’ve made sure that these have been cast aside. And then there’s the state that will be bail them out when they get too greedy – they’ve even gone and got themselves that set up too.
I heard today that the this Government is subsidising the purchase of new electric cars but at a level that means that only those who can actually afford to pay for one themselves WITHOUT the subsidy are getting it!! Neo-liberals would call that a ‘level playing field’ and fair!
It’s a sick society that is.
As for turmoil – well, if you are a player (that is, if you have the wealth) turmoil means the opportunity to pick off assets cheaply. Turmoil, strife, recession – these are the playgrounds of the rich – let’s face it. But we are the ones that are paying.
As Mirowski points out, there is a cunning Janus- like duality inherent in Neo-liberalism. For example it abhors the State when it helps society (which they call interference or voter bribery), but cuddles up to the State so that it de-regulates, protects private property rights but also uses its legal power to extend them (privatisation, patents obtained by just discovering natural things but not making them).
Then there is the efficient markets hypothesis which as far as I can tell has no basis in fact whatsoever. The market is meant to be the best processor of knowledge that there is according to you average Neo-lib. But when you confront them with the asymmetries of market information or greed and fear they just smile and say that you hadn’t got up early enough to take part or its just a few bad apples.
Honestly – the neo-libs have it all covered. They’re very clever – and (dare I say it) purely agnotological in practice.
Just in case somebody else also needs enlightenment:-
Agnotology (formerly agnatology) is the study of culturally induced ignorance or doubt, particularly the publication of inaccurate or misleading scientific data. It was coined in 1995 by Robert N. Proctor, a Stanford University professor, and linguist Iain Boal.
In the beginning, the Stock market had a connection to the real world. Long since taken-over by the greedy & immoral, who have nothing material or positive to contribute to the good of the world. Oh, and of course, I should mention, they’re all terribly clever.