Month: May 2021

Authored by Stephen Roach via Project-Syndicate,

The US Federal Reserve is insisting that recent increases in the price of food, construction materials, used cars, personal health products, gasoline, and appliances reflect transitory factors that will quickly fade with post-pandemic normalization. But what if they are a harbinger, not a “noisy” deviation?

Memories can be tricky. I have long been haunted by the inflation of the 1970s. Fifty years ago, when I had just started my career as a professional economist at the Federal Reserve, I was witness to the birth of the Great Inflation as a Fed insider. That left me with the recurring nightmares of a financial post-traumatic stress disorder. The bad dreams are back.

They center on the Fed’s legendary chairman at the time, Arthur F. Burns, who brought a unique perspective to the US central bank as an expert on the business cycle. In 1946, he co-authored the definitive treatise on the seemingly rhythmic ups and downs of the US economy back to the mid-nineteenth century. Working for him was intimidating, especially for someone in my position. I had been tasked with formal weekly briefings on the very subjects Burns knew best. He used that knowledge to poke holes in staff presentations. I found quickly that you couldn’t tell him anything.

Yet Burns, who ruled the Fed with an iron fist, lacked an analytical framework to assess the interplay between the real economy and inflation, and how that relationship was connected to monetary policy. As a data junkie, he was prone to segment the problems he faced as a policymaker, especially the emergence of what would soon become the Great Inflation. Like business cycles, he believed price trends were heavily influenced by idiosyncratic, or exogenous, factors – “noise” that had nothing to do with monetary policy.

This was a blunder of epic proportions. When US oil prices quadrupled following the OPEC oil embargo in the aftermath of the 1973 Yom Kippur War, Burns argued that, since this had nothing to do with monetary policy, the Fed should exclude oil and energy-related products (such as home heating oil and electricity) from the consumer price index. The staff protested, arguing that it made no sense to ignore such important items, especially because they had a weight of over 11% in the CPI. Burns was adamant: If we on the staff wouldn’t perform the calculation, he would have it done by “someone in New York” – an allusion to his prior affiliations at Columbia University and the National Bureau of Economic Research.

Then came surging food prices, which Burns surmised in 1973 were traceable to unusual weather – specifically, an El Niño event that had decimated Peruvian anchovies in 1972. He insisted that this was the source of rising fertilizer and feedstock prices, in turn driving up beef, poultry, and pork prices. Like good soldiers, we gulped and followed his order to take food – which had a weight of 25% – out of the CPI.

We didn’t know it at the time, but we had just created the first version of what is now fondly known as the core inflation rate – that purified portion of the CPI that purportedly is free of the volatile “special factors” of food and energy, where gyrations were traceable to distant wars and weather. Burns was pleased. Monetary policy needed to focus on more stable underlying inflation trends, he argued, and we had provided him with the perfect tool to sharpen his focus.

It was a fair point – to a point; unfortunately, Burns didn’t stop there. Over the next few years, he periodically uncovered similar idiosyncratic developments affecting the prices of mobile homes, used cars, children’s toys, even women’s jewelry (gold mania, he dubbed it); he also raised questions about homeownership costs, which accounted for another 16% of the CPI. Take them all out, he insisted!

By the time Burns was done, only about 35% of the CPI was left – and it was rising at a double-digit rate! Only at that point, in 1975, did Burns concede – far too late – that the United States had an inflation problem. The painful lesson: ignore so-called transitory factors at great peril.

Fast-forward to today. Evoking an eerie sense of déjà vu, the Fed is insisting that recent increases in the prices of food, construction materials, used cars, personal health products, gasoline, car rentals, and appliances reflect transitory factors that will quickly fade with post-pandemic normalization. Scattered labor shortages and surging home prices are supposedly also transitory. Sound familiar?

There are many more lessons from the 1970s that shed light on today’s cavalier dismissal of inflation risk. When the Fed finally tried to tackle the Great Inflation, it fixated on unit labor costs – rising wages accompanied by sagging productivity. While there are always good reasons to worry about productivity, wages appear to be largely in check; unionized labor, which, in the 1970s had sparked a vicious wage-price spiral through cost-of-living indexation, has been neutralized by global competition. But that doesn’t rule out a very different form of global cost-push inflation – namely, the confluence of supply-chain congestion (think semiconductors) and protectionist clamoring to reshore production.

But the biggest parallel may be another policy blunder. The Fed poured fuel on the Great Inflation by allowing real interest rates to plunge into negative territory in the 1970s. Today, the federal funds rate is currently more than 2.5 percentage points below the inflation rate. Now, add open-ended quantitative easing – some $120 billion per month injected into frothy financial markets – and the largest fiscal stimulus in post-World War II history. All of this is occurring precisely when a post-pandemic boom is absorbing slack capacity at an unprecedented rate. This policy gambit is in a league of its own.

For my money, today’s Fed waxes far too confidently about well-anchored inflation expectations. It also preaches the new gospel of “average inflation targeting,” convinced that it can condone above-target inflation for an unspecified period to compensate for years of coming in below target. My students would love to throw out their worst grade(s) as well!

No, this isn’t the 1970s, but there are haunting similarities that bear watching. Timothy Leary, one of the more memorable gurus of the Age of Aquarius, purportedly said, “If you remember the 1960s, you weren’t there.” That doesn’t apply to the 1970s. Sleepless nights and vivid flashbacks, complete with visions of a pipe-smoking Burns – it’s almost like being there again, but without the great music.

Amid the fifth and what’s expected to be the final round of Iran nuclear talks in Vienna, the director-general of the International Atomic Energy Agency (IAEA) has voiced that time is running out on reaching an agreement given the Islamic Republic has already reached bomb-building capability in terms of enriched uranium purity levels. 

IAEA chief Rafael Grossi told Financial Times that Iran has reached uranium purity levels that “only countries making bombs are reaching” after routinely ramping up enrichment since Trump pulled out of the Obama-era JCPOA back in May 2018.

Calling the current situation “very concerning” (and especially if a deal is not ultimately reached in Vienna), he explained to FT:

“A country enriching at 60 per cent is a very serious thing — only countries making bombs are reaching this level,” said Grossi. “Sixty per cent is almost weapons grade, commercial enrichment is 2, 3 [per cent].”

Grossi still defended Iran’s “sovereign right” to do so. Tehran has always justified its program as only for domestic energy consumption needs, while its Ayatollahs over the years going back to the 1980’s have consistently condemned nuclear weapons as ‘unIslamic’. 

“We don’t seem to find much need for that at the current level of industrial, medical activity in Iran, but this is for a country to decide,” he said.

Just ahead of this week’s round of talks in which draft documents of an agreement are expected to be hashed out and finalized, Tehran and the UN nuclear watchdog IAEA reached a last minute understanding to extend a technical agreement which allows inspectors access to surveillance images of nuclear sites after just before the weekend Iran ended the program. This vital access which allows for continued close monitoring was extended for up to another month, which all parties hope is long enough to see a deal through. 

IAEA sounded the alarm once things got serious as regards the Iran deal. https://t.co/rkt26DrA1C

— Velina Tchakarova (@vtchakarova) May 26, 2021

Meanwhile, there’s little doubt that IAEA chief Grossi’s words will be received with most worry and alarm in Tel Aviv after on Tuesday Israeli PM Benjamin Netanyahu said while standing at a press conference beside US Secretary of State Antony Blinken: “I can tell you that I hope that the United States will not go back to the old JCPOA because we believe that that deal paves the way for Iran to have an arsenal of nuclear weapons with international legitimacy,” the PM said.

“We also reiterated that whatever happens, Israel will always reserve the right to defend itself against a regime committed to our destruction, committed to getting the weapons of mass destruction for that end,” the Israeli prime minister added, introducing a bit of awkwardness at the meeting given Blinken responded by reiterating US support for reaching a deal with Iran.

Authored by Jonathan Turley,

The long-awaited, though partial, release of a memorandum from the Justice Department this week left many “frustrated,” as predicted by the Washington Post, in Washington. The reason is what it did not contain.  Critics had sought the memo as the “smoking gun” to show how former Attorney General Bill Barr scuttled any obstruction charges against Donald Trump.

Instead, the memo showed the opposite.

The staff of the OLC actually found that the allegations did not meet the standard of obstruction even without any defenses or privileges related to Trump’s office.

The issue of obstruction of justice ran throughout Barr’s second term as Attorney General. Before his confirmation hearing, a memo was released that Barr wrote to Deputy Attorney General Rod Rosenstein on a potentially serious flaw in the use of the most likely federal provision on obstruction of justice against Trump. Barr was hammered by Democratic senators on his view of obstruction, as was I when I testified the next day as a witness. I agreed with many of the flaws noted by Barr in the memo.

Barr’s more nuanced arguments were drowned out by a long litany of experts like Harvard Professor Laurence Tribe who publicly insisted that obstruction was not only clearly established (with a long litany of other crimes) but that Barr’s rejection of that crime was evidence of his raw partisanship. In a public letter to me, Ralph Nader, Lou Fisher, and Bruce Fein stated that his rejection of obstruction was akin to “a papal encyclical that President Trump was innocent of obstruction of justice” that ignored Mueller’s “chronicle [of] multiple instances of evidence of obstruction.”

Throughout this never-ending barrage, Barr remained largely silent on the internal review of the matter and declined to release the full OLC memo. That only increased speculation that Barr must be hiding countervailing conclusions of legal staff. We know now that (at least the now disclosed portion of) the memo supports Barr’s prior view and, despite that fact, he withheld the information out of concern for the confidentiality of the internal deliberations.

It turns out that the review and debate over the obstruction allegations began before Barr started as Attorney General. The memo also confirms that the Mueller staff was part of that analysis with career prosecutors at Main Justice. The memo states that the prosecutors reviewed the Mueller evidence and concluded that the evidence “examined by the Special Counsel could not, as a matter of law, support an obstruction charge under the circumstances. Accordingly, were there no constitutional barrier, we would recommend, under the Principles of Federal Prosecution, that you decline to commence such a prosecution.” In plain English, that means that the prosecutors came to the same conclusion as Barr that the alleged conduct did not satisfy the elements of this crime. Moreover, it stated that it would recommend against such a charge even without consideration of any constitutional barriers presented by Trump’s office.

The new information was released after Judge Amy Berman Jackson issued a scathing criticism of the Justice Department, including arguments and representations advanced by the Biden Justice Department. The Justice Department apologized for a lack of clarity on some points but said it would appeal order to release of the entire OLC memo.

Jackson however lashed out at Barr. In issuing his controversial summary of the report, Jackson said Barr suggested that he had little time to review the whole Mueller report when “[t]he fact that he would not be prosecuted was a given.”

Jackson seems to ignore the obvious to justify the most sensational takes on these facts.  She declares: “So why did the attorney general’s advisers, at his request, create a memorandum that evaluated the prosecutorial merits of the facts amassed by the special counsel? Lifting the curtain reveals the answer to that too: getting a jump on public relations.”

The answer would seem obvious. Since his nomination, the issue of obstruction had been used to fuel allegations of partisanship and manipulation of the process. With the release of the report, it was likely to be focus of questions from Congress and the public. While the review of this question (according to the memo) began before Barr’s arrival, he wanted a clear and dispositive record of how this decision was made – and who made it. That certainly does anticipate public questions but it was also a responsible thing to do. He asked the OLC to render a formal opinion on the issue – just as the Obama Administration did in such important and public controversies.  Barr was creating a record of the conclusions of staff counsel on an issue of great national importance.  I still do not see why such a request is untoward or unusual.

Clearly there is more to this memo so we might find something truly incriminating or embarrassing, but the record of the OLC review is not one of them. Indeed, if Barr had not requested such a letter, the same pundits would now be questioning what was concluded and whether Barr imposed his own previously stated view in the matter. The letter created a record of how the conclusion was reached and who reached that conclusion.

The controversy of Barr’s summary largely focused on a couple lines where he said that the underlying facts from by Mueller would not satisfy the elements of the crime of obstruction. It turns out that staff had made that conclusion as did some of us from existing and controlling case law. Moreover, Barr stated that the reason for the delay in the release was the removal of any grand jury material as required by federal law.

The released portions does not contradict Barr’s claim that he could not simply release a two-volume, 450-page report. One can fairly criticize aspects of that summary but the delay of the release of the report (and need for a summary) falls more squarely on Mueller. Past hearings established that Barr and Rosenstein told Mueller that they wanted his staff to flag grand jury material because Barr wanted to release the redacted report rather than a summary.  Mueller appears to have simply ignored that instruction from his superiors. As a result, a full review had to be performed with Mueller’s staff to remove grand jury material, which is mandatory under federal rules.  If Mueller had flagged and redacted the grand jury material, the redacted report could have been released without much delay as Barr preferred.

The memo also undermines the claims raised in the first impeachment of Donald Trump. I testified in that hearing and disagreed with my three co-witnesses (Professors Michael Gerhardt, Pamela Karlan, and Noah Feldman) who insisted that Trump had committed obstruction of justice. They were not alone. Democrats and the media paraded a letter from over 450 prosecutors who declared unequivocally that:

“Each of us believes that the conduct of President Trump described in Special Counsel Robert Mueller’s report would, in the case of any other person not covered by the Office of Legal Counsel policy against indicting a sitting President, result in multiple felony charges for obstruction of justice.” 

The actual prosecutors at Main Justice found that not only would the allegations not meet the standard for obstruction of justice but that it would still be the case even if Trump was not the President of the United States.  The contrast shows the danger of such gotcha letters. With thousands of professors and prosecutors, it is not particularly difficult to get hundreds of signatories to support one side or another in a controversy. The Justice Department does not prosecute by plebiscite and this is why.

The day before he was effectively fired by Trump, I had lunch with Barr as we have done for many years. He was again being publicly savaged by the President over his refusal to support his electoral fraud claims and take steps against figures like Hunter Biden. Yet, he is still unlikely to be recognized for what he did for the Department during one of its most difficult periods. However, history will likely be kinder to Barr than his critics. As stated in King Lear, Barr remained from the beginning to the end “a man more sinned against than sinning.”

After yesterday’s blockbuster 2Y auction which pushed bond yields sharply lower and which we said was an indication that the inflationary storm has passed with bond traders no longer expecting any rate hikes for the foreseeable future, moments ago the stench of deflation was positively rancid after today’s $61BN 5-Year auction was just as almost as solid as Tuesday’s auction.

Printing at a high yield of 0.788%, the 2Y auction stopped 5.5bps below April’s auction and also stopped through the When Issued 0.794% by 0.6bps, the first stop through for the tenor since Jan 2021.

Meanwhile, and like yesterday, the Bid to Cover jumped, rising from 2.31 last month to 2.49 today, the highest since Sept 2020 and obviously well above the six-auction average of 2.34.

The internals were also stellar with Indirects taking down a whopping 64.4%, the highest foreign award since August 2020 and far above the 57.9% recent average. And with Directs taking down a lower than average 14.9%, Dealers were left holding 20.8% of the auction, the lowest since August.

Overall, a stellar bond auction, and one which together with yesterday’s 2Y auction suggests that demand for tomorrow’s 7Y issuance will be vastly greater compared to the dismal 7Y bond sale in late February when the bellybuster auction was nearly a flop and sparked a major bond and stock market selloff.

The damage control – literally and figuratively – continues at Tesla.

The company has now said it is going to do away with a radar sensor in favor of using a “camera-focused Autopilot system,” Reuters reported on Wednesday. The change is going to apply to both Model 3 and Model Y vehicles in North America, starting this month.

The move comes as scrutiny of both “Autopilot” and “Full Self Driving” – two features that clearly don’t live up to their name the way they are labeled – has intensified. Additionally, as CNBC noted, “radar sensors are relatively expensive” and this could be yet another cost for Tesla to try and cut. 

“Pure vision Autopilot is now rolling out in North America,” Tesla CEO Elon Musk said on Twitter, referring to the change. Recall, Tesla had to quickly shelve its last Full Self Driving beta after numerous humiliating videos surfaced of the software having repeated issues and quickly went viral. 

The Full Self Driving beta v8.2 was thrashed by critics like Road and Track who called it “laughably bad” and “potentially dangerous”.

“If you think we’re anywhere near fully autonomous cars, this video might convince you otherwise,” Road and Track wrote about Tesla’s Full Self Driving feature. The article referred to the feature as “morally dubious, technologically limited, and potentially dangerous”. 

Tesla says some features could be disabled during the transition, according to Bloomberg. Musk had referred to radar sensors as “crutches” during the company’s latest earnings call, the report notes. 

Tesla’s blog on its website said:

We are continuing the transition to Tesla Vision, our camera-based Autopilot system. Beginning with deliveries in May 2021, Model 3 and Model Y vehicles built for the North American market will no longer be equipped with radar. Instead, these will be the first Tesla vehicles to rely on camera vision and neural net processing to deliver Autopilot, Full-Self Driving and certain active safety features. Customers who ordered before May 2021 and are matched to a car with Tesla Vision will be notified of the change through their Tesla Accounts prior to delivery.

For a short period during this transition, cars with Tesla Vision may be delivered with some features temporarily limited or inactive, including:

• Autosteer will be limited to a maximum speed of 75 mph and a longer minimum following distance.
• Smart Summon (if equipped) and Emergency Lane Departure Avoidance may be disabled at delivery.

In the weeks ahead, we’ll start restoring these features via a series of over-the-air software updates. All other available Autopilot and Full Self-Driving features will be active at delivery, depending on order configuration.

Recall, earlier today we noted that Waymo had committed to stop using the term “self-driving” due to safety concerns. 

The company said it was doing this “so as not to give drivers a false sense of security in the technology,” according to Chief Safety Officer Mauricio Pena, who wrote an op-ed for CNBC this week.

“At Waymo, where I’m Chief Safety Officer, ensuring that the public has an accurate perception of the technology is a top priority. We’re confident that autonomous driving technology has the potential to save lives—as demonstrated by study after study. But we also know that many people don’t fully understand how ADVs work, and that people fear what they don’t understand,” he wrote.

The op-ed continues:

“Several years ago, we launched a public education campaign aimed at demystifying the technology for the general public, because we’ve seen that the more people learn about it, the more eager they’ll be to embrace it. Through that work, we have witnessed how language shapes people’s perception, and how the words we use to describe technology will ultimately influence how people engage with and use it.”

And finally explains Waymo’s reasoning for replacing the term with “autonomous driving”:

“That’s true of working in any nascent industry, because you’re not just creating the foundational technology that future generations will build on, but you’re also introducing it to people for the first time. That is just as true for building ADVs here at Waymo as it was for me when I worked on innovative rocket launches and commercial space travel.

And it’s a big reason why we decided to drop the term “self-driving” from our lexicon earlier this year, and instead started using the term “autonomous driving,” exclusively. It’s not just a branding exercise, and it’s not just a hypothetical—it’s about limiting confusion to improve safety outcomes.”

“If someone is overly confident in a technology because they misinterpret the words used to describe it, they could unknowingly take risks that jeopardize their own safety and the safety of the people and cars around them,” the op-ed concludes.