Tuesday, May 10, 2016

Don't listen to this guy.


Fed doesn’t get it about global excess supply, winning forecaster says.

"The Federal Reserve is blowing it because it thinks the economy could be overheating, but the real problem is excess supply and deflationary pressure, says Steven Ricchiuto, chief economist for Mizuho Securities USA and the winner of the Forecaster of the Month contest for April."

The article goes on to say:

"“We should be immunizing the nation against deflation,” Ricchiuto said. But, instead, the Fed still seems to be living in the 1970s, worried that the unemployment rate will go too low and that the economy will overheat. That’s why the Fed “blew it in December” when it raised interest rates."

This guy is totally wrong. We are almost through the deflationary pressure and I will tell you why. The above chart is a 5 year chart. Somewhere around the summer of 2014 (where the big black arrow is) it began to click for me that if the weak dollar caused inflation - the strong dollar would cause deflation.

This happens because oil is traded in dollars. When our dollar is strong it makes it so other countries have to put more of their resources into buying oil. This obviously puts downward pressure on their economies causing less demand because they are spending more money on oil. You with me?

Over the summer of 2014 the Fed was insisting they were going to raise rates. This caused the dollar to strengthen even more causing more pain for the developing world. (i.e. less demand)The Fed couldn't say they weren't raising rates. They had no choice. Or reveal they were liars all along.

Now we are at a stage where the dollar could strengthen a little more. And other currencies could weaken a little more. But a 25 cent move in the dollar is probably unlikely. That is really pretty big. (I can't even believe I have to know this crap.) Things would have to get very dire in other countries for this to happen. Things also probably wont get much worse in the US because we have basically been floating along the stall line for the whole year. Something very very bad would need to happen. And a simple recession I doubt will cut it.

We are closer to the end of deflation People, than the beginning. The Fed absolutely should raise rates again. Even though it is a little alarming to see rates down in the 3.39% rage again today.

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