Start of a new era

[Tuirc]

Perhaps I wasn't clear enough. Prices have ALREADY risen A LOT in housing. This in conjunction with higher mortgage rates makes housing unaffordable to many.

QT and what the Federal Reserve have done (so far) is a joke. When COVID hit, the Fed dropped rates from 1.5% to zero in two steps, on March 3, 2020 and March 15, 2020. They didn't talk about it for six months before hand, and they did not do a little bit and then wait for the next meeting (the second drop was between regularly scheduled meetings). It's all a game - first there is no inflation, then it is "transitory", then even when the geniuses knew it wasn't transitory - they still waited. Then they did a small increase, but still kept the QE in place. The result is that they are severely behind the curve...with inflation over 8% a .75%-1.00% federal funds rate is (repeated here) a joke.

Even now, QT has barely started - as I understand it the first items to mature won't take place until a couple weeks into June.

What has been interesting to me is the markets reaction to minimal hiking. The Q1 GDP had a negative print. If we get a negative print Q2 then we will "officially" be in a recession. More worrisome was the dramatic decline in GDP growth (to drop) from Q4 2021 (6.9%) to Q1 2022 (-1.5%).

Me? I don't think we've seen anything yet. The inflation we've seen so far does not really reflect food shortages due to the war in Ukraine.

It is now summer in the North East where 85% of the fuel oil for heating homes is used. How will people's spending (on other goods/services) be impacted this coming winter? In Nov. 2020, fuel oil averaged $2.12/gallon, now $5.13/gallon (and rising). Let's use my house as an example: Without burning wood, I would use around 1200 gallons of fuel oil per year (that includes domestic hot water) - and that is with keeping the house at 60 or so during the winter. So that would be $6156/year at current prices, $9600 if fuel oil/diesel reaches $8/gallon. Can I afford it? Yes, but that kind of coin is going to impact the spending of a LOT of people.

On the food front, Poland is racing to try to help Ukraine export its wheat crop, but estimate that they will be able to (at best) move 1/3 of the wheat in the upcoming weeks. My nephew keeps getting emails from the USDA telling him he can request early termination of CRP contracts w/o penalty (i.e. instead plant).

Each of us has to assess what is to come, and place our bets accordingly. Perhaps you will be correct, we will have a "moderate" recession. Certainly that is what most have been predicting. After all, both the government experts and the federal reserve think we have the best economy, and Powell (March 16) didn't see a recession in 2022. I am not among them.

Does this mean I've sold all my stocks and proceeded to my bunker? No. As I've stated, I think the fed will "pivot" sooner than expected...they will see some moderation in inflation and declared victory, but it really will be because of deteriorating economic conditions. So, I can't just sell out because stocks remain a better than nothing inflation hedge.

I'm very much in line with your views and causation. What I've recently been noticing though is the US is apparently out of line with the other currencies. In our case, we're attempting to take the lead in addressing our inflation problem. That makes US currency more expensive. To the extent others don't follow us, fairly quickly in addressing their inflation problem, the dollar will stay very strong (currently trading at $1.07 to the Euro and $1.25 to the Pound) which is a pretty significant change in just a couple months. QT will have an even stronger impact on currency pricing.

As we all know, the downside of strong currency is balance of trade goes south. Relatively expensive goods out of the US not finding a market overseas. Relatively cheap goods from overseas finding a ready market in the US. Less tourism as the US gets more expensive to visit. Greater tourism from the US to overseas locations as they become a value to us. All of that will have a negative impact on employment.

That said, I concur that the next 12 months will be in recession. I think "soft landing" is a fairy tale. This is gonna hurt. I don't think I'm being pessimistic at all. It's just when you add all of this up, "soft landing" just isn't in the cards. Frankly, I'm becoming concerned that it's going to take longer than 12 months to work our way through the recession and the people in charge don't impress me as smart enough to get us out of this. I hear "stagflation" getting thrown around a lot. Some of us were around when that was being used in earnest in the late 1970s and early 1980s. I saved a Time magazine from December 1980 when John Lennon was killed. The parts of the magazine not devoted to that story talked about the Reagan transition team and about the current economy. The Prime Rate was 21% (what we call the bank rate now). Inflation was bouncing between 12% and 16%. Experts were talking about South American style "hyperinflation" becoming a reality in the US. A line you cross when you hit 18%, apparently. When the Fed decreased rates to improve jobs, inflation would go crazy. But, when it raised rates to deal with inflation, unemployment would cross the 10% mark. That was Stagflation. I do think we have the apparacheki in place to recreate a really solid stagflation for us.

The only good news in all of this is that I'm still employed and I've pushed my retirement date out another year.

 

[Tuirc]

My definition: A recession is when your neighbor loses their job, a depression is when you lose your job.

So NBER can (after the fact) declare us in a recession even with a positive 2Q print. The current 2Q GPDNow estimate as of 6/1 is 1.3% (and falling).

Source: https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf. If it stands as is, we will have had negative GDP growth for the first half of the year.

The truth of it is that we will know in retrospect, as the numbers get modified/adjusted, and NBER declarations are after the fact.

My prediction: It will become quite apparent that we are in recession even to those in the room sipping coffee w/fire all around (h/t to the 'This is fine" meme). In the meantime, people can and will talk about how it really isn't deteriorating, that employment will remain robust, that corporate are great and growing, and so on. All I can say is that I distinctly remembering such talk working in the financial district in 2007.

To anyone who thinks we won't be in a recession when the numbers come out in July....I seriously doubt you're right. Regardless of that fact, if we manage to slip the noose this time 'round, we'll definitely get it in the Q3 & Q4. (and Q1 & Q2 for that matter). To use terminology of the pandemic, "it's baked in." All the elements have already been combined. We're only left to eat the pie.

 

[Tuirc]

The short answer is that the 2007 Housing Crash could have been the Great Depression, and in response the Fed pulled out all stops (probably appropriately).

Once quantitative easing was started, it was almost impossible for the Fed to reverse, given the impact on the Market and the economy. Just like Volker crashed the Carter (and the first two years of the Reagan) economy, this will probably crash the "Biden" economy; the Fed is far more important than the President, no matter what Party. Same for energy prices. Inflation has caused the reversal; remember due to demographics and imports/China we have been in disinflation for more than 20 years.

This will not go well for housing prices (If you own one and are wanting to cash out) or employment, but then we are at full employment. The other knock-on effects will be interesting, whatever they are. This assumes the Fed does not reverse in a year, which is a big assumption. I'm sure someone on the blawg or on the Wall Street Journal knows a lot more than me, but they all seem to be just winging it, like me, although undoubtedly at least some are more informed than me.

See my comments above on what the "economy" was in 1980. Having lived through that, albeit as a very young man, I wouldn't express too much sorrow for Volker "crashing" the Carter economy. It was not a good one to try to live in and what came after was one hell of a lot better. There was no way out of the stagflation mess without drastic action like that taken by Volker. We're probably facing a similar mess, we just haven't hit the unemployment part yet. But to get out of it will probably require just as drastic an action as Voker had to take, but there probably aren't any Volkers around to execute it. Even if there were, what would the rest of the world's economies do? We could be sterling in and of ourselves and still be left "high and dry" if none of the other economies are bold enough to follow along.

 

[Markola]

I can’t argue with the above, unfortunately. Seems a good time to remember and catalog the levers and shock absorbers in our personal tool kits.

 

[Gumby]

There was a video on CNBC this morning saying that 68% of those who retired during the pandemic would consider going back to work. There is also a large group of non-retirees who just lost their job. They've been surviving on the helicopter money, but that's coming to an end, so they'll likely be returning to the workforce. So it would appear that the labor market is not as tight as it would seem initially, which is disinflationary. There is also a large inventory overhang, which is also disinflationary as prices are cut to pare it down. Maybe the Fed will not need to raise rates to Volcker levels in order to curb inflation. I remain hopeful.

 

[Markola]

I’m one of those and that’s one of my levers! But the success scores on our portfolios are supposed to incorporate all prior history to help us navigate future hurricanes, with adjustments as needed, hopefully short of such draconian measures.

 

[eytonxav]

Given the feds very late and gradual bump approach to address inflation, largely caused by politicians, and a continuation of the horrendous policies coming from DC, it appears to me we are headed for very bad times unless these present courses are quickly modified.

 

[MichaelB]

There was a video on CNBC this morning saying that 68% of those who retired during the pandemic would consider going back to work. There is also a large group of non-retirees who just lost their job. They've been surviving on the helicopter money, but that's coming to an end, so they'll likely be returning to the workforce. So it would appear that the labor market is not as tight as it would seem initially, which is disinflationary. There is also a large inventory overhang, which is also disinflationary as prices are cut to pare it down. Maybe the Fed will not need to raise rates to Volcker levels in order to curb inflation. I remain hopeful.

This is an important point. The CNBC video is consistent with unemployment data pre-dating the pandemic, where >75% of retirees indicated they planned on or considered working past retirement age (here)

In addition, an alternate measure of unemployment, also tracked regularly by the BLS called U6, counts people that are unemployed plus marginally attached plus part time still make up almost 7% of the work force. That’s a high number and it shows considerable slack. What makes this relevant is inflation is less likely to become chronic or self sustaining unless wages continue to spiral upward, and that is less likely to happen while slack remains in the labor force.

I think the longer term outlook for the US economy is more positive now than in 2019, pre-pandemic. Investors may be more concerned, and with good reason, but economic activity, along with the livelihoods of people who contribute to it, can continue at a sustainable pace and with a more equitable distribution.

 

[Running_Man]

So, why exactly have we needed a program/policy like "quantitative easing" for 10+ years?

Because 60% of the companies in the stock market do not make any money and need borrowing to continue to operate. Interest rates will sink the entire economy which is why this will not go beyond a month or two, it is mathematically impossible. If the FED knew they could do this without consequence it would not have been delayed a year.

It was interesting today, for the first time, there was no trade in the public debt of Japan other than the bank of Japan buying any treasuries any member of the public wanted to sell. But to keep economy operating they need 0.25% interest rates.

 

[copyright1997reloaded]

The Atlanta Fed GDPNow forecast for 2Q has been revised (further) downward, now at +0.9%.
https://www.atlantafed.org/cqer/research/gdpnow

As an aside, for those of you on the Tweet Bird (Twitter), I find Liz Ann Sonders (Chief Investment Strategist, Charles Schwab ) feed a great sources of information:
https://twitter.com/LizAnnSonders

 

[copyright1997reloaded]

This is an important point. The CNBC video is consistent with unemployment data pre-dating the pandemic, where >75% of retirees indicated they planned on or considered working past retirement age (here)

In addition, an alternate measure of unemployment, also tracked regularly by the BLS called U6, counts people that are unemployed plus marginally attached plus part time still make up almost 7% of the work force. That’s a high number and it shows considerable slack. What makes this relevant is inflation is less likely to become chronic or self sustaining unless wages continue to spiral upward, and that is less likely to happen while slack remains in the labor force.

I think the longer term outlook for the US economy is more positive now than in 2019, pre-pandemic. Investors may be more concerned, and with good reason, but economic activity, along with the livelihoods of people who contribute to it, can continue at a sustainable pace and with a more equitable distribution.

While I disagree regarding outlook of 2019 vs. now, I do agree that U6 suggests that there are many more potential workers out there that aren't counted as unemployed. We saw that occur (a little) in the latest report when the labor participation rate ticked up (and the unemployment rate did not go down further). Some of this might be the roll off of "stimy" $, i.e. people needing to actually work for $ rather than having it be given to it. Some of it might be people no longer thinking they can day trade the market, or because their portfolios have gotten clobbered.

We are already seeing hiring slow down dramatically in tech companies, including rescission of outstanding offers. (To all, remember employment data are lagging indicators). Higher unemployment rates are coming.

ETA: Running Man's post - forgot to mention that there are tons of unprofitable companies out there that had easy access to funding - that has essentially dried up. No more cash means that they will be shedding work force.

 

[Amethyst]

Bear in mind that the horrendous policies you mention, if you're talking about payouts ("Stimulus payments"), are a recognition of growing income inequality and many people's inability to meet daily expenses. People on this forum are not, for the most part, "those" people, yet they exist in large numbers, and are restless and resentful.

The administration perhaps has concluded that widespread internal unrest would create worse times for the country, than a hit to our 401K's, property values, etc.

I don't like it any more than anyone else. Facing what we're facing, I don't know what policies I'd try to introduce.

Given the feds very late and gradual bump approach to address inflation, largely caused by politicians, and a continuation of the horrendous policies coming from DC, it appears to me we are headed for very bad times unless these present courses are quickly modified.

 

[corn18]

Bear in mind that the horrendous policies you mention, if you're talking about payouts ("Stimulus payments"), are a recognition of growing income inequality and many people's inability to meet daily expenses. People on this forum are not, for the most part, "those" people, yet they exist in large numbers, and are restless and resentful.

The administration perhaps has concluded that widespread internal unrest would create worse times for the country, than a hit to our 401K's, property values, etc.

I don't like it any more than anyone else. Facing what we're facing, I don't know what policies I'd try to introduce.

Whatever impact the stimulus checks had is dwarfed by the impact of the Fed printing money.

 

[Amethyst]

No doubt you're correct. As I said, I can't imagine what I'd do, that would have a net, overall, positive psychological as well as fiscal impact. Perhaps there truly isn't anything.

Whatever impact the stimulus checks had is dwarfed by the impact of the Fed printing money.

 

[daylatedollarshort]

Janet Yellen says, "We're seeing high inflation in almost all of the developed countries around the world. And they have very different fiscal policies," Yellen said. "So it can't be the case that the bulk of the inflation that we're experiencing reflects the impact of the ARP [American Rescue Plan]." - https://www.reuters.com/markets/us/...s-inflation-yellen-tells-senators-2022-06-07/

 

[corn18]

Janet Yellen says, "We're seeing high inflation in almost all of the developed countries around the world. And they have very different fiscal policies," Yellen said. "So it can't be the case that the bulk of the inflation that we're experiencing reflects the impact of the ARP [American Rescue Plan]." - https://www.reuters.com/markets/us/...s-inflation-yellen-tells-senators-2022-06-07/

The developed countries experiencing high inflation had the same fiscal policy as the US since 2008. Print money. The EU did it, probably more so than the US on a percentage scale. Their bond rates went negative. So, a false idol.

Inflation is caused by money supply. That supply can be increased from the Fed printing or the government deficit spending. It really is that simple. And the only way to fix it is to decrease the money supply.

This is why we have inflation:

 

[daylatedollarshort]

The developed countries experiencing high inflation had the same fiscal policy as the US since 2008. Print money. The EU did it, probably more so than the US on a percentage scale. Their bond rates went negative. So, a false idol.

Inflation is caused by money supply. That supply can be increased from the Fed printing or the government deficit spending. It really is that simple. And the only way to fix it is to decrease the money supply.

But for most of the time since 2008, inflation was very low and global interest rates worldwide were dropping for decades until just recently - The Historical Decline in Real Interest Rates and Its Implications for CBO’s Projections (2020) - "The Congressional Budget Office’s interest rate forecast is an important input into the agency’s budget projections. In the United States and globally, real (inflation-adjusted) interest rates have trended downward since the early 1980s. Research on the factors leading to that decline points to demographic changes, such as slowing labor force growth and the aging of the populations; slower trend growth of real output; and a global saving glut. The policy responses to the financial crisis of 2007 to 2009 and the 2020 coronavirus pandemic also played a role in the downward movement in global interest rates. Additionally, over the past several decades, demand for safe liquid assets has markedly increased, driving down the interest rates on such assets in relation to the rates on risky assets."

 

[corn18]

Inflation was building up from 2008-2020, it was hiding. Now it has popped out, caused by the huge influx of money in 2020. It is going to be very painful reducing the money supply by that much. Very, very painful.

 

[daylatedollarshort]

Inflation was building up from 2008-2020, it was hiding. Now it has popped out, caused by the huge influx of money in 2020. It is going to be very painful reducing the money supply by that much. Very, very painful.

I have never heard of inflation hiding for 30 years being a thing. Do you have a source on how that occurs?

 

[corn18]

I have never heard of inflation hiding for 30 years being a thing. Do you have a source on how that occurs?

Who said 30 years? I said 12 years.

I believe Milton Friedman has the best analysis on inflation, and it isn't what is commonly believed. Watch this video and see if you can relate anything to 2022.

 

[daylatedollarshort]

Who said 30 years? I said 12 years.

I believe Milton Friedman has the best analysis on inflation, and it isn't what is commonly believed. Watch this video and see if you can relate anything to 2022.

Sorry my mistake. Twelve years then. That video is an hour long and seems to be on inflation in general. Which we haven't had until a year or so ago, per my link above.

 

[corn18]

Sorry my mistake. Twelve years then. That video is an hour long and seems to be on inflation in general. Which we haven't had until a year or so ago, per my link above.

Ok, don't watch it, but it changed my view on what causes inflation and how to get rid of it. The whole Free to Choose series is worth watching.

 

[copyright1997reloaded]

Inflation was building up from 2008-2020, it was hiding. Now it has popped out, caused by the huge influx of money in 2020. It is going to be very painful reducing the money supply by that much. Very, very painful.

This.

Excess money *is* inflation. Where it shows up FIRST isn't necessarily in consumer goods. All one has to do is look at the money velocity charts:
https://fred.stlouisfed.org/series/M2V

Note the dramatic decline in M2 velocity, which has now leveled off.

So, if it (inflation) didn't show up in CPI or PPI measurements, where did it go? Asset prices: Houses, stocks, bonds (higher prices = lower yields), other financial instruments. These are (for the most part) hidden from CPI/PPI calculations. Even increases in house prices are not quickly reflected in the CPI since 1987 when the CPI calculation was changed to use "Owners equivalent rent". For any who cares, here's a write up from the BLS explaining OER: https://www.bls.gov/opub/btn/volume-2/owners-equivalent-rent-and-the-consumer-price-index-30-years-and-counting.htm#:~:text=Changes%20in%201987%20and%20the,than%20reweight%20the%20renter%20sample.. (I am biting my tongue in terms of what I think of this methodology).

But as I've babbled before, *eventually* people want to spend their wealth. Perhaps we are seeing some of that for a number of reasons, including:

1) A lot of people have lost a couple years of their lives in terms of doing the things that they wanted to do, especially if they are older. YOLO is the motto, do now what you might not be able to do later.
2) Another psychological aspect - if you think prices will be stable/going down, you will tend to delay purchases. Why buy now what you can buy cheaper later? So with declining prices and rising asset prices - spending on stuff is somewhat deferred. Now switch the situation - if you think prices are going up, and going up quickly - the mantra is to buy NOW because it will be more expensive later.

So here we are. As you state, we have tons of excess money sloshing through the system. Some of that has (had?) been reflected in demand for things, some of which in short supply. Some of that excess money was (is?) reflected in asset prices (stocks, bonds), and perhaps in real things (houses). How much has to been taken out before things settle remains to be seen.

I am still of the school that the Federal reserve and US Government do not have the determination to solve the inflation issue. I *do* think we will see some moderation in prices as the impacts of energy prices continue to bite more deeply. But I think the economy will decelerate and the "prevent a depression" siren will then override "we have to stop inflation". And it is my opinion that they will grab at "moderation" and declare victory and then crank up the printing press.

The above is why: 1) I haven't sold more equities, 2) I haven't gone longer term on fixed (other than inflation adjusted) and 3) Why I've slowly but surely increased my allocation in the last two years to oil, gas, commodities, precious metals.

But as someone else posted (about themselves), "But what do I know?" No one knows the future, and all I get do is to try to analyze, place my bets, and adjust as best I can when circumstances change.

Now time for me to get get to the wood that needs to be split - winter is coming.

 

[Markola]

Because 60% of the companies in the stock market do not make any money and need borrowing to continue to operate.

Yikes, what a datapoint. For those keeping score at home, so far we’ve noted that the money printers must inevitably churn nonstop to:

1) Shore up 6 in 10 companies that are zombies so that they continue to employ people.

2) Keep money plentiful and interest rates low enough so that Congress’ bipartisan record debt payments can possibly be met.

3) Have a source of conjured funds for military adventures abroad, which Americans would not probably want to be taxed outright for.

4) Prevent mass unemployment and societal unrest resulting from every pandemic, recession and depression.

Remind me again why Jerome Powell and Janet Yellen want their jobs?

 

[braumeister]

Thanks for the interesting discussion.

Some posts had to be deleted, and the thread has outlived any usefulness it had.