200 THE BiG DROP
is being reduced in the labor market. If labor can get a raise
that might be an early indicator of inflation and that might
mean we’re getting closer to the point where she needs to raise
interest rates.
I look at data out so far in 2015, and I look at my thesis,
which is that deflation has the upper hand. There’s a tug-of-
war, as we’ve described, but in a tug-of-war one team seems to
get the upper hand on the other from time to time, and right
now it does look like deflation’s got the upper hand.
I’ve said a number of times — and it continues to be my
view — that the Fed is not going to raise rates in 2015. And
yet, when there’s a rosy employment report you say: hold on.
This would certainly push the Fed in the direction of raising
rates when you have job creation and real wages going up.
Does that change the thesis?
I’ve spent considerable time thinking about that because
we do have to be alert to these trends. To me, deflation still has
the upper hand as of early 2015.
Look at the oil patch, for evidence. The US rig count is
down, layoffs are going up, capital expenditure plans are be-
ing cut; you can see all those things happening.
But they don’t happen overnight. It takes awhile to work
through the supply chain and all of the places where oil is an
input. It shows up at the gas pump pretty quickly and it shows
up in airfares pretty quickly. But for some industrial processes,
it takes awhile to filter through.
Those trends are still working their way through the
economy — especially layoffs. They tend to come in waves.
Companies start with some layoffs, and then do more the next
month and more the month after that. They wait and see if
things turn around, which I don’t expect they will.
Compounding those problems is the big eight hundred
pound gorilla in the deflation scenario — the currency wars.
They’re getting more and more intense. Between January