Wednesday, March 19, 2014

The Fed's Rear View Mirror

Click to enlarge.

The black line shows the annual growth in the 2 year moving average of retail sales.

The blue line shows the annual average of the 2 year moving average of the Fed Funds rate.

It might seem a bit silly to do the blue series this way (an average of an average), but I want to make sure that I'm comparing apples to apples, while simultaneously smoothing out the noise. Both smoothed series should be nearly perfectly aligned. My ultimate goal is to test the reaction time of the Fed as changes in retail trade occur.

Note that the growth rate in retail sales is currently slowing just like it was heading into the last two recessions. That's not good and very few seem to notice or care. It's especially bad because most people seem to think the 10-year treasury yield is artificially low. I strongly disagree. It's too high. Seriously, that's what I believe.

If I am right (might not be) and the next recession is looming then...

1. What can we expect for help when we're already in ZIRP?
2. When can we expect help?

I have no answer for the first question. Who knows what insanity the Fed will ultimately try next? I think I can offer some insight into the second question though. Take a look at that chart again. Do you see what I see? Here, let me help. I'm going to shift the blue series to the left by 2 full years.

Click to enlarge.

Pay special attention to the period from 2001 to 2009. Good @#$%ing grief. I had to impose a two year lag to get both series to line up, and line up they did!

The Fed apparently sees and reacts, with nearly crystal clarity, to what has happened 2 years previously. If that is true, then they are just now seeing the booming retail sales growth in January of 2012. No wonder they are tapering. No wonder they are talking about ending ZIRP in 2015. No wonder Bernanke couldn't spot the housing bubble in real time.

Now let's look at the Great Recession. Note that the Fed would have probably moved their rate well below 0% if it had been possible. Since it wasn't possible, they tried to make up for it by sticking with ZIRP for an extended period.

It was hoped that the economy would accelerate to the point the Fed would have to raise short-term rates at some point. I remain extremely skeptical. As seen in the charts, overheating would be the last word I would use to describe what's been happening to retail sales growth since 2012. And unless you truly believe that this winter's weather can explain a declining growth rate over two years, then you too may wish to be skeptical.


My first update stated that I had concerns over the math. The original post stands as is. Here are two fairly foolproof (but noisier) charts that confirm the theory. Whew!

Click to enlarge.

I think it could safely be argued that the Fed was putting out housing's 2005 inflationary fire in 2007. Awesome timing! Not.

Click to enlarge.

This chart once again shows the Fed's 2 year lag in all its glory.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart


Mr Slippery said...

It lines up if you shift it about 5 years into the future, too. Maybe the Fed is projecting what will happen 5 years from now, when there really will be a boom!?! Nah, I think the rear view mirror analogy works better.

It was utter confusion today when the Fed said would tighten and loosen because the economy is doing OK except for the weather [paraphrasing].

I may not like what is coming, but things are going to get interesting again.

Stagflationary Mark said...

Mr Slippery,

I had to add the dreaded "my personal blunders" tag to this post.

I tried an experiment in Excel using sine waves and I did not get the results I expected. Additional lag is being added. Not sure where it is coming from. Probably has something to do with my "apples to apples" moving averages.

Stagflationary Mark said...

False alarm!

Problem solved. I was able to remove the personal blunders tag. The only blunder was in thinking that there was a blunder. Whew! :)

Stagflationary Mark said...

Mr Slippery,

It was utter confusion today when the Fed said would tighten and loosen because the economy is doing OK except for the weather [paraphrasing].

I thought the Fed said they would loosen and tighten because the weather was doing okay except for the economy! ;)

Just goes to show how confusing it was, lol. Sigh.

Troy said...

The 'what' for help is tax cuts.

The 'when' is 2017, assuming the GOP takes it in 2016. It's their turn at the wheel after all.

Stagflationary Mark said...


Sounds like a campaign promise in the making!

0% tax rates!
0% interest rates!
0% unemployment!

It's a long-term prosperity triple-play!

(Or until elected, whichever happens first, lol. Sigh.)

mab said...

The Fed is clueless (likely purposely so). They base their decisions on bogus eCONomic theories that are either easily disproved or no longer valid.

Just take the Fed's "inflation expectations" theory for example. It's absurd. Inflation does not come for expectations!!!

And don't ever, ever, ever get me started on the Fed's false mandate. Dual mandate my @ass!

Con artists and propagandists. Grrrrrrr!

Stagflationary Mark said...


They base their decisions on bogus eCONomic theories that are either easily disproved or no longer valid.

Surely the "wizards" in ivory towers are setting them straight!

Forehead. Desk. Whack. Whack. Whack.

mab said...

If we cannot prosper off of our debt any longer then we probably can't prosper off of our stock market any longer either.

That's how I see it.

I too became very pessimistic during the housing bubble. And I got most of it right - the big housing bust, weak economic growth, bank solvency issues, stagnant wages, deflation/low inflation, poor employment.

Japan was my guide. But I sure didn't see the stock market ramping like this.

Imo, banks and hedge funds have bid up stock prices using leverage. Main St. is on the sidelines. Fool me once!

Fed or no Fed, I feel ultimately reality will set in.

No way am I ready to concede the point to Siegel either. Especially with Gov't deficit spending waning!!

Anonymous said...

The Fed pundits have been using the wrong terminology. They should be analysing the Fed's "delayed reaction function".

Stagflationary Mark said...


But I sure didn't see the stock market ramping like this.

That's how I felt in 2007 too. Couldn't understand how investors could rationalize both the housing bust *and* $100+ oil.

I guess those corporate earnings seemed too awesome to miss until the bottom fell out.

Stagflationary Mark said...


Perhaps they should use medical terminology!

What Is a Delayed Allergic Reaction?

A delayed allergic reaction typically begins between two and three days after exposure to an antigen, rather than almost immediately. Such reactions can be observed with a number of allergens and can be tricky to diagnose and treat because doctors usually assume allergies are related to recent exposures.

dd said...

I don't think this stock market is about "investors" at all; it's about our new new economy and the Financial Stability Oversight Council and its super awesome Ironman powers to re-unify all the "independent" agencies into the Fed and Treasury. The stock market is the ultimate TBTF, and the symbol of American "free market" superiority. The central planners will do all it takes to make sure it never fails again. My bet is the Fed buys S&P futures before the taper ends right around your recession target date.

Stagflationary Mark said...


Here's an alternate theory.

If and when the stock market cannot go up over time, then the wealthiest can still make money off of it as long as it swings back and forth between really good and really bad (assuming they can find enough retail investors to do the opposite).

Just a thought. Sigh.