And he’s back with the latest monthly commentary, two paragraphs I found interesting, 1) the viewpoint on the hurricanes harvey and irma – just a side note: even though there will be gdp growth as a result of re-building, actual productivity doesn’t go anywhere if everything replaced is like-for-like, that’s the amusing thing with gdp numbers; 2) the idea of inflation, I’ve argued for years that technology is positively deflationary for labour which may partially explain the low inflation figures, then again I’ve also argued that the value of real assets has increased far above inflation and isn’t properly recognised in the inflation estimates..anyways..onto Wien!
We know that the Federal Reserve was considering an additional increase in the federal funds rate in September, but was discouraged from taking any action by hurricanes Harvey and Irma. The planned shrinkage of the Federal Reserve balance sheet was probably also delayed for the same reason. The S&P 500 has also shown a tendency to peak after each rate increase by the Federal Reserve and we have only begun the tightening cycle now. The hurricanes are likely to reduce third-quarter real GDP growth by at least one-half of one percent, but demand driven by rebuilding should be reflected positively in the fourth quarter and the first quarter of 2018.
Many investors are concerned about an increase in inflation in view of the tight labor market that has resulted from the low level of unemployment and the monetary expansion that began in 2008 and continued until last year. As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” Friedman is no longer around to answer to his fellow economists as to why his pronouncement is no longer accurate. The combination of globalization and technology have worked together to keep inflation low. The highly respected and closely watched Phillips curve no longer has predictive value. It would argue that inflation should be moving up because of low unemployment. We had a similar circumstance in 1999 when the Federal Reserve decided to raise interest rates by a quarter point in spite of a lack of evidence that inflation was rising. They kept raising rates and by May of 2000 the federal funds rate was 6½%, up from 4¾% in June 1999, thereby contributing to the bear market we experienced at that time when the technology bubble burst. They are not likely to make the same mistake again.