Brave New World (Excerpt)

In the Brave New World (BNW), robots like Baxter will replace assembly line workers. In this world, the risk of ultra-easy monetary policies isn’t consumer price inflation. Even now as we approach the dawn of the BNW, such inflation remains remarkably low despite the best efforts of the central banks to boost it. The CPI inflation rate among the G7 economies was only 1.6% y/y during February, and even lower at 1.4% excluding food and energy. In the US, PPI inflation rates are close to zero. In the euro zone, the CPI inflation rate is just 1.7%, and 1.4% excluding food and energy. Japan continues to experience deflation despite years of NZIRP and QE.

In the BNW, pumping more liquidity into financial markets won’t stop consumer price deflation, but it will inflate asset prices, a.k.a. asset bubbles. Central bankers like Ben Bernanke at the Fed and Haruhiko Kuroda at the BOJ are still using models based on the 1930s. They are clueless about the BNW. That’s why they are so committed to doing whatever it takes to avert deflation. They can’t even imagine that productivity-led deflation should be welcomed as the best way to boost the purchasing power of all consumers, whether employed or on government support.

This morning we learn that the BOJ voted unanimously to significantly increase its purchases of Japanese government bonds and extend the average maturity of the bonds it purchases from three years to seven years. Mr. Kuroda has previously said that he would do "whatever it takes" to drive growth. Sure enough, the bank added that it would also buy relatively riskier assets such as exchange-traded funds and real estate trust funds!

Today's Morning Briefing: Brave New World. (1) The future is coming. (2) World State as drug dealer. (3) Gordon, Stockman, and Huxley. (4) Alternate state of mind. (5) Robotics Revolution. (6) Foxconn wants to get rid of “animals.” (7) Google’s vision. (8) Meet Baxter, the friendly humanoid. (9) No lunch breaks, just $4 an hour and some WD-40. (10) A disaster for cheap labor in EMs? (11) More income inequality, more taxes, and more government. (12) Clueless central bankers are fighting the last war. (13) BOJ will be buying Nikkei ETF. (14) Fed’s doves ready to compromise with hawks. (15) Sequester nicked March economic indicators. (More for subscribers.)

Food Prices (Excerpt)

Last week, the USDA pegged corn stocks as of March 1 at 5.399 billion bushels, above the average analyst estimate of 5.013 billion bushels. The USDA also said farmers would plant the highest corn acreage since 1936. The nearby futures price of corn has tumbled from a recent high of $7.41 per bushel to $6.41. Wheat prices are also down sharply over this period.

Lower grain prices should keep a lid on food inflation, which is a positive development for consumers' purchasing power and should allow the Fed to maintain its ultra-easy monetary policy. Of course, the Fed tends to track inflation excluding food and energy. The core CPI was up only 2.0% y/y during February. The personal consumption deflator rate was even lower at 1.3%.

Today's Morning Briefing: Heartland. (1) On the road again: Houston, Fort Worth, Dallas, & KC. (2) What’s the matter with us? (3) No country for cranky old men. (4) Accentuating some positives, once again. (5) Laffer is rooting for the Red team. (6) Food and fuel prices stop ascending and could descend. (7) Profits in GDP making new highs. (8) Why are stock prices rising while earnings estimates have been chopped? (9) One hotspot is heating up, while another is cooling off. (10) Technicians don’t like what they see in the charts. (11) Europe falls deeper into recession. (12) The prairie sky in Texas. (More for subscribers.)

Cyprus & Lehman (Excerpt)

While the Cyprus Moment seems to have come and gone, the risk is that the country’s bailout plan has set the stage for a run on euro zone banks. The biggest shocker, of course, was that the deal included a “bail-in” of uninsured depositors in Cypriot banks and the imposition of severe capital controls. Fears of a possible financial contagion are reflected in the 7.6% drop in the FTSE Eurofirst 300 Banks Euro Index since January 28. Also down ytd are the stock markets of Greece (-4.3%), Spain (-3.2), and Italy (-9.2).

Cyprus may be a one-off unique situation. So far, it hasn’t triggered a financial meltdown comparable to Lehman. However, there is at least one similarity that is disturbing: Both reflected “bailout burnout” by policymakers. On the other hand, this time financial market participants may be less panic prone knowing that the ECB will do whatever it takes to defend the euro. When Lehman hit the fan, no one had a clue of the Fed’s unprecedented QE response to the resulting financial crisis. So far, Italian and Spanish government bond yields remain relatively low. The S&P 500 Bank stock price index is down only 2.5% since March 15.

Today's Morning Briefing: Seasonal Adjustment? (1) Bernanke’s spin on wacky seasonal pattern. (2) Stay or go? (3) Timing corrections is tricky. (4) BLS economists beg to differ. (5) Europeans get agitated in the spring, then go to the beach in August. (6) Triple top? (7) Still aiming for 1665 for S&P 500 by yearend. (8) Cyprus and Lehman are examples of “bailout burnout.” (9) Fiscal drag nicks US M-PMI. (10) EMs emerging more slowly. (11) Little Kim is having growing pains. (12) Q1 shows relatively broad bull market. (More for subscribers.)

CNBC Appearance

S&P 500, QE, & FSMI (Excerpt)

Fed officials, particularly the dovish ones calling the shots, are clearly preparing the financial markets for the phasing out of QE. That was obviously the intent of NYFRB President Bill Dudley on Monday when he delivered a speech titled “The Economic Outlook and the Role of Monetary Policy.” He has been an early and leading advocate of QE. However, for the first time he talked about “dialing back” QE.

I believe that the bull market can survive the phasing out of QE if the US economy continues to strengthen, which is the only reason why the Fed would do so in the first place. A strong case can be made that the bull market of the past four years has been directly tied to the Fed’s purchases of fixed-income securities.

I have also related the bull market to our Fundamental Stock Market Indicator (FSMI), which continues to rise to new cyclical highs. We may be reaching an inflection point where bad news out of Europe and the prospects of less QE from the Fed aren’t bearish for stocks because the US economy is fundamentally sound, which is bullish for stocks. Yesterday’s fundamentally sound reports on durable goods orders and home prices helped boost stock prices. Enjoy your Spring Break! We will be back on Tuesday.

Today's Morning Briefing: Give Us Your Tired Rich. (1) Never mind. (2) The Dutch finance minister is new on the job. (3) Cyprus is very special to Russians. (4) Putin’s threat. (5) There will be repercussions. (6) The US dollar, stocks, and real estate are all safe havens for wealthy foreigners. (7) Dudley is ready to dial back. (8) Phasing out QE should be bullish for stocks. (9) Focus on S&P 500 housing-related industries. (More for subscribers.)