Brokered CD's in Rising Interest Rate

[24601NoMore]

NoMore - it do think it’s very likely inflation is up another 7-10% in the next 12 months. I think you would be surprised at how much companies held back on raising prices over the last 10 months originally due to expectations inflation was transient and then that it would be over in early 2022. PPI is actually getting worse and commodities are way worse. We’ve raised prices 10% in the last 14 months and if prices for inputs don’t come down or labor doesn’t fall off quickly, we’ll have to raise prices 15+% in the US to maintain margin - and that’s assuming it doesn’t get worse.

Well reasoned as PPI is indeed rising also, but guess we'll have to see where things are a year from now. Consumers are ALREADY at the breaking point. Many people are having to decide what to give up to afford basic necessities. For those and reasons, I'd be stunned if we're at 7-10% inflation on top of the 8.5% (probably closer to 20%) we've already experienced. People simply can't afford to live at those prices.

A term I've heard used often recently is "Demand Destruction". And as we all know, prices can only be raised to a point where demand is indeed destroyed, and less widgets are sold at those levels. Companies will then "have" to lower price to a point where they can sell the units needed to meet revenue targets. Said another way, companies can't just say "hey, we have to pass on PPI increases to Consumers" because there's a point the Consumer just stops buying that product.

Of course, there are some products and services (eg: healthcare) with a more inelastic demand curve, but short of absolute essentials (and I'm not talking the latest pair of Nike sneakers), there's Demand Destruction that occurs and prices eventually revert to what the market will bear.

As an example - we bought a new (used) house last fall. It has nice Andersen windows, but some need repair. Had a company out. They gave us their bid. THREE HUNDRED DOLLARS **PER HOUR** labor. Um, no. I'm not paying (nor can I afford to pay) someone $300 per HOUR to fix windows. I'm not hiring a lawyer or a doctor. I need someone to fix some windows. And at $300 an hour (they quoted 6 hours work, so $1,800 labor), I'm not a buyer and will just live with what we have..eventually, I'm sure they'll run out of idiots..er...willing customers..who are OK with $300 an hour for window repair (good grief!!) I darn near threw the guy (physically) out of my house..

 

[Magus]

I don't think consumers at their breaking point in general. "Nice to have" things like vacations are having record leisure demand at prices 30% higher than 2020 as one example. Consumer balance sheets in general are very strong. Once you start seeing 3-4 months in a row in declines in retail sales then you might be there, but it hasn't shown up in the US yet. UK March was like this but hard to tell with just one month, especially with Russia too. Incomes are rising and jobs are plentiful for folks looking to make more money.

Unfortunately with PPI at 11+%, most companies would indeed rather sell fewer and raise the price than maintain price and keep volume the same if it comes to that. For our company we'd need an elasticity of around 2.5 to be worse off on the bottom line than raising prices. It's been below 1 for pricing so right now definitely a much better to raise prices.

And the longer this goes on, the stickier this gets.

 

[24601NoMore]

I don't think consumers at their breaking point in general. "Nice to have" things like vacations are having record leisure demand at prices 30% higher than 2020 as one example. Consumer balance sheets in general are very strong. Once you start seeing 3-4 months in a row in declines in retail sales then you might be there, but it hasn't shown up in the US yet. UK March was like this but hard to tell with just one month, especially with Russia too. Incomes are rising and jobs are plentiful for folks looking to make more money.

Probably depends on what segment of the consumer market you're looking at, as in the lower to middle class (the people most severely affected by inflation), every stat I see is that those people are indeed at their breaking point (largely). Sure, there are exceptions like in everything, but as I and DW are now ourselves in that solid middle with no more W-2 paychecks coming in and a market that's in meltdown, I can tell you we are absolutely feeling the pinch. And everyone I talk to echoes similar experiences..now, if you take the young kids (mid 30s) that bought our house..he works for a Silicon Valley software company and probably pulls in north of $250K, probably $300K or more with RSUs. They are not feeling the pinch and having a grand old time. Last time I was over there, they're spending money like it's flowing freely from the tap..lots of remodeling. Tons of new adult and kid toys..lots of travel..etc..yeah, I remember those days of six figure W-2s also. Unfortunately, that's long behind us.

All depends on what segment of the consumer market you look at, IMHO..

Guess we will see. But I'm sticking with my 4% target for 23 and do think that's going to wind up high.

 

[Magus]

Lower to middle class workers also are getting the largest pay increases, however. It's not as uniform as you think and It also depends on where you are located. Someone making $14/hr in California with gas at $6 and rents 40% of their income is going to be feeling inflation a lot worse than someone in the SE or Midwest at $13 with gas at $3.79 and rent at 25% of their income. I have yet to see any stats on lower income pulling back at this point. We've seen a bit of it on the West coast where higher gas prices are but not otherwise at my (national) company. We're also just starting to see more folks come back to work as well, which will likely to give before significant pullbacks in spending occur (adjusted for population growth, we're 5-6 million jobs below Feb 2020).

It's possible the full year 2023 (Dec 31 2023 vs Dec 31 2022) could be at 4% but now until March 2023? I'd bet 7-10%. Would love to be wrong, but just don't see it. Actions the fed takes won't show up in inflation for over a year, typically and they still have a very significantly negative real rate. The US bond market has started to price in MSD inflation for several years here.

 

[jldavid47]

Did you also assume the level of inflation we are experiencing right now? Personally, if I was going to buy CD’s or bonds right now, I’d keep the duration very short - two years or less.

+1

I've been buying treasuries with maturities between 6 and 18 months mostly. I've been staying away from brokered CDs (at Schwab) only because treasury yields have been consistently higher over my maturity range than CD yields and when I buy them in a taxable account I pay no state income tax.

YMMV

 

[pb4uski]

^^^ Yes, last time that I looked 0-5 year UST yielded a little more than brokered CDs but the pattern was inverse for longer maturities. I haven't looked lately so it ay have changed.

 

[ERhoosier]

Right now Treasuries are yielding more than CDs except for long terms. In this rising rate environment I have NO interest (pardon the pun) in fixed income instruments beyond 2-3 yr. terms. The Fed has openly been saying they will raise rates until inflation is under control, and no one really knows when that will be. IOW- Most evidence suggests we are not near the top of this interest rate cycle.

Many on this forum remember the inflation (inc. stagflation) of the '70's-early '80's when 10 yr Treasury yields progressively climbed to over 15% in '81. IMHO- Current risk of tying up significant $$$ in UST's at 2.5-3% for 10+ yrs ain't worth the minimal incrementally higher rate vs 2-3 yrs.

 

[Turbo29]

Now it seems that brokered CDs are higher for 2yr and up.


Fidelity -- Fixed Income, Bonds & CD

 

[VFK57]

Right now Treasuries are yielding more than CDs except for long terms. In this rising rate environment I have NO interest (pardon the pun) in fixed income instruments beyond 2-3 yr. terms. The Fed has openly been saying they will raise rates until inflation is under control, and no one really knows when that will be. IOW- Most evidence suggests we are not near the top of this interest rate cycle.

Many on this forum remember the inflation (inc. stagflation) of the '70's-early '80's when 10 yr Treasury yields progressively climbed to over 15% in '81. IMHO- Current risk of tying up significant $$$ in UST's at 2.5-3% for 10+ yrs ain't worth the minimal incrementally higher rate vs 2-3 yrs.

I think because of GDP fell 1.4% 1st 2022 quarter, the Feds will not raise the rate or raise it no more than .25%. Even .25% will help to push the GDP lower. We are in stagflation according to many economists.

 

[jldavid47]

I think because of GDP fell 1.4% 1st 2022 quarter, the Feds will not raise the rate or raise it no more than .25%. Even .25% will help to push the GDP lower. We are in stagflation according to many economists.

Real GDP fell 1.4% because the GDP price deflator rose 8% which dropped the 6.6% nominal growth to -1.4%. Taming inflation will bring real growth back in line. It looks more like a statistical shrinkage than an actual one.

The Fed has clearly signaled their intent. 2.5% by the end of the year for the Fed Funds rate is a minimum expectation at this point. Given the rate of inflation they should be aiming at least twice that high.

I lived through the stagflation of the 1970s and remember it well. We aren't even close to that yet. I suspect the economists who are spewing that line are almost all under 50.

 

[jldavid47]

IOW- Most evidence suggests we are not near the top of this interest rate cycle.

Historically, interest rate cycles tend to last decades. We could easily see an uptrend in interest rates for the next 30-40 years. Of course, there will be occasional dips and variability but the overall trend in rates is likely to be up for a long time.

 

[OldShooter]

Historically, interest rate cycles tend to last decades. We could easily see an uptrend in interest rates for the next 30-40 years. Of course, there will be occasional dips and variability but the overall trend in rates is likely to be up for a long time.

I am scratching my head trying to remember the title of a book I recently read. No joy. The author was looking at interest rates in history, falling from numbers like 100% in biblical times to today's single digit numbers. His argument was that the main driver for this was increasing availability of capital. When capital was very scarce it could command high rates. In today's world, many are willing to loan at near zero +/- rates. By his rationale, rates will rise over 30-40 years only if capital becomes more scarce.

 

[jldavid47]

We have 8.5+% inflation today primarily because of 2 things: HUGE ($5 Trillion+) monetary policy - direct checks to households, moratorium on things like rent and loan repayment, child tax credits and all sorts of other "free stuff" from the US Govt. Unfortunately, that was done at pretty much the same exact time that we drastically lowered production of just about everything because of COVID shutdowns.

Econ 101..greatly reduce supply while increasing demand (because most everyone all of a sudden had a LOT more available funds than previously so went out and bought "stuff"), and inflation is going to go bonkers - just as it has.

Fast forward to today..that's all (mostly) done with. No more huge checks to households. Production is ramping back up..supply and demand levels will re-calibrate.

The problem with this argument is that the main driver of inflation is none of the above but rather supply chain disruptions which are still ongoing and are getting worse due to shutdowns in China.

My guess is that it is going to be 3-4 YEARS before the supply chain normalizes and that's if WW III doesn't break out. Until that happens supply shortages will continue which will continue to push inflation upwards.

While the next 12 months may not see a repeat of the ~8% inflation we've seen the past 12 months, I think 4% is overly optimistic. Of course, I don't have a crystal ball either.

 

[VFK57]

Since 1971 we do not have Gold backed US$. All our goods and services should correspond to the money we have circulating or stored in Banks (and invested by the Banks). The more money have been printed, while goods and services are at same level or economy growth was less to cover the freshly printed money, would lead to inflation. Then why we did not see this high inflation until last year? It was Pandemic and greatly reduced trade. We recovered, at least for now, but inflation is growing. Raising interest rates might lead to crush in a stock market and not so strong economy with it. Just what I think.

 

[Magus]

The problem with this argument is that the main driver of inflation is none of the above but rather supply chain disruptions which are still ongoing and are getting worse due to shutdowns in China.

My guess is that it is going to be 3-4 YEARS before the supply chain normalizes and that's if WW III doesn't break out. Until that happens supply shortages will continue which will continue to push inflation upwards.

While the next 12 months may not see a repeat of the ~8% inflation we've seen the past 12 months, I think 4% is overly optimistic. Of course, I don't have a crystal ball either.

In the US, supply chain is greatly exaggerated about why inflation is happening except used vehicles. Imports for example are WAY higher than pre-pandemic - so that really can't be the primary issue despite what some want to believe. It's simply the demand side of the equation is at record levels due to a massive - and I mean massive - increase in the money supply the last 26 months (>40%) with massive spending by both the consumer and government and indirectly the federal reserve plus rising asset values in the last few years have allowed enormous increases in wealth -> spending. Inflation in the US in housing, energy and food among many other items have nothing to do with supply chain issues and inflation was soaring long before Ukraine.