Fed Now Says It Should Have Acted Sooner on Inflation

[pjigar]

+1
For the last decade, virtually all the discussions on FIRE risks focused on investment rates of return and possible corrections. Inflationary risk was really never mentioned as a risk factor because, well, we had had a decade of extraordinarily low rate of inflation.

Funny you say this. I prepared my investments around 2013-2015 after post-2008 printing money spree. The best thing I can do at the time to hedge against inflation was real estate so I bought several rental houses at low fixed rate 30 year mortgages. Leverage with low interest rate seemed a logical thing to do for a cash flowing investment. I thought we were primed for the inflation but it never came! Fast forward today, after one more huge round of QE, we are finally here. But my leverage has diminished due to the years passed. I wonder what can I do today to hedge from inflation which is already here? I don't have answer since everything (Stocks, Bonds, RE) to me seems expensive from PE perspective. May be I will start selling overpriced stuff, wait for the bond rate to sky rocket and load up on bunch of bonds eventually. But then again, I have written off on bonds in the last two decades. Alas, I don't have a crystal ball.

 

[USGrant1962]

Inflation will not depend on the Feds increase interest rates. Inflation is caused by shortages in the Global Supply Chain. Fix the global supply chain to meet demands, and that will change the inflation trajectory. This is a supply side shortgage problem, not lowering the demand side.

Not exactly - it WAS caused by both supply and demand. But it looks like the helicopter money has finally been mostly spent (total personal savings are now back to pre-covid levels). https://fred.stlouisfed.org/series/PMSAVE

Hopefully going forward it is mostly driven by supply-side, which should straighten out over time. Unfortunately, we are now at risk of a wage-price spiral that will probably take Fed action to dampen.

 

[Turbo29]

The nation's debt is a result of US deficit spending, what does the Fed have to do with that? That's on Congress and the Administration.

While the second part of what you write is true, if they do raise rates it doesn't affect current debt issued one iota... the impact to interest cost bleeds in over time as new debt is issued for future deficits and refinancing of existing debt.

The Fed enables the deficit spending by buying so much of the debt, which keeps interest rates down. If the Federal Government had to sell those trillions in debt without the Fed buying up trillions at the same time, interest rates would be a lot higher.

 

[pb4uski]

Interesting hypothesis. Got any proof? I think the reality is that federal debt is in such demand that the Fed's QE purchases, while very significant, probably didn't have much impact on the interest rates that such debt was issued at.

 

[luckydude]

"all squarely on the Fed". Thinking about this, in a not so nice analogy: The FED is the drug dealer, and we are the strung out junkies. Who is to blame?

To use your analogy, I would say that the government with its very loose fiscal policies (i.e. massive spending in the name of stimulus with zero consideration for deficit) are the drug dealers handing out money and we as consumers are the junkies spending them.

The Fed, on the other hand, is supposed be the "adult in the room" (or the cop, to use your analogy), monitoring the dynamics between the government and the consumers while using monetary tools to fulfill its dual mandate of price stability and maximum employment. It is supposed to step in whenever any government or consumer actions or other external factors threaten its dual mandate.

But lately the Fed seems to have abandoned at least one of the mandate (i.e. price stability). Instead, it has joined the fray, perpetuating an environment of cheap credit that allows the consumer and government junkies to keep borrowing and spending. So here we are.

I don't expect that the government is always be responsible with its fiscal policies. And I certainly don't expect that we as consumers/investors are always responsible or rational with our financial decisions. But I do expect that the Fed as an independent institution is always responsible in fulfilling its dual mandate. And if it isn't doing its job of being "the adult in the room", then it is to blame.

 

[luckydude]

Funny you say this. I prepared my investments around 2013-2015 after post-2008 printing money spree. The best thing I can do at the time to hedge against inflation was real estate so I bought several rental houses at low fixed rate 30 year mortgages. Leverage with low interest rate seemed a logical thing to do for a cash flowing investment. I thought we were primed for the inflation but it never came! Fast forward today, after one more huge round of QE, we are finally here. But my leverage has diminished due to the years passed. I wonder what can I do today to hedge from inflation which is already here? I don't have answer since everything (Stocks, Bonds, RE) to me seems expensive from PE perspective. May be I will start selling overpriced stuff, wait for the bond rate to sky rocket and load up on bunch of bonds eventually. But then again, I have written off on bonds in the last two decades. Alas, I don't have a crystal ball.

Inflation has been so low for so long that most people have taken it as matter of course. It simply hasn't factored into most FIRE folks' retirement equation. It certainly didn't factor into mine. I happen to be in an unique position of having around 80% of my portfolio in RE, but that is due to a combination of circumstances which have nothing to do with any consideration for inflation. So I kind of lucked into a position of having a ton of RE position to hedge against inflation.

I agree with you in that I don't see any viable place to "hide" from inflation. All asset classes seem to be very expensive/overpriced with downside risks due to impending (dare I wish) rate hikes. I capitulated this past week and exited all my VG bond positions. Holding large amount of cash is less than ideal in this environment but I don't see any other viable options.

 

[captain3d]

Gold hitting $2000/oz this morning is another angle on this

 

[aja8888]

https://wolfstreet.com/2022/03/06/c...s-happening-at-my-gas-station/#comment-415595

The price of nickel futures today spiked by over 93% intraday from Friday’s close, to just over $56,000 per metric ton at the peak, an all-time record, and then settled down a bit and is currently at $50,271 per metric ton, up by 73% in one day on the London Metals Exchange, the biggest spike in the history of the futures contract going back 35 years.

Nickel is used in stainless steel, batteries, electric motors, some non-ferrous rod and sheet products, etc.

Commodities going nuts now.

 

[all4j]

I find this type of thread to be interesting to look over; never sure how representative the posters are of broader universe. My comments aren't based on solely this thread though. I think many have a tendency to want simple causes/cures & rely too heavily on short term "trends". I think we are seeing a few untried economic mindsets unravel.

I find both of those tendencies to be dangerous in these times, especially for those who rely on more experienced investors to guide the path. I would advise anyone in that situation to proceed cautiously. One size will NOT fit all here. Rather, be sure you know the problem you are addressing. Does your time horizon & risk tolerance mesh with whoever is giving advice? Are you more concerned about return On your money or return OF your money? (& really that should be purchasing power). Are you looking tactically or strategically?

What to do next? Well, if you gave thought to your plan before, review it to see how well you've done. Adjust accordingly. If not, consider the need for a plan. If concerns are tactical, it is too late to make major moves; maybe consider some insurance. Don't let politics &/or emotions drive your plan. I for one think the world will look very differently in years ahead & this is a transition more than a new normal. Past results won't predict future results.

Time will tell

 

[lawman]

Funny you say this. I prepared my investments around 2013-2015 after post-2008 printing money spree. The best thing I can do at the time to hedge against inflation was real estate so I bought several rental houses at low fixed rate 30 year mortgages. Leverage with low interest rate seemed a logical thing to do for a cash flowing investment. I thought we were primed for the inflation but it never came! Fast forward today, after one more huge round of QE, we are finally here. But my leverage has diminished due to the years passed. I wonder what can I do today to hedge from inflation which is already here? I don't have answer since everything (Stocks, Bonds, RE) to me seems expensive from PE perspective. May be I will start selling overpriced stuff, wait for the bond rate to sky rocket and load up on bunch of bonds eventually. But then again, I have written off on bonds in the last two decades. Alas, I don't have a crystal ball.

Everyone says bonds are a lost cause..Bonds have always served to reduce volatility offering limited upside but relatively safe from big losses..Seems to me they still offer that..I understand that low interest rates keep bond dividends/interest low but that's nothing new..I also understand that returns will not keep up with inflation but at this point what will? What is different about bonds now other than the low rates being paid? Tell me a bettter place to put my money..My bond funds are presently yielding around 2% and better. Where can I put my money that will do that without increasing risk?

 

[jeffmete]

My first house mortgage was 9% back in 77, my dad was amazed and told me not to pay that much as it had to come down. Moved in 1982 and had a 16.5% mortgage!

 

[maestro]

Following Fed for over 40 years now, I've come to realize they're just another political arm. Big shots coming in from Wall Street or Yale or Harvard to run it, appointed by both sides over the years, and not ONE understands true economics, goods and services, supply and demand. Hideous.

 

[pb4uski]

Following Fed for over 40 years now, I've come to realize they're just another political arm. Big shots coming in from Wall Street or Yale or Harvard to run it, appointed by both sides over the years, and not ONE understands true economics, goods and services, supply and demand. Hideous.

Laughable.

 

[all4j]

https://wolfstreet.com/2022/03/06/c...s-happening-at-my-gas-station/#comment-415595




Nickel is used in stainless steel, batteries, electric motors, some non-ferrous rod and sheet products, etc.

Commodities going nuts now.

This may be covered in other threads, but this seemed a convenient place to mention. The nickel market -- London Metal Exchange or LME -- has become a somewhat interesting story since this post. A certain trader who had a short position is multi-billion in the hole. Some trades were backed out & the market closed for indefinite period. Last I heard until 'sometime next week'. Not unlike when there was a similar case for tin market in 1980s; that market was closed for over 4 years.

Today tesla announced price increase that I understand was due to price of nickel. Complicates the migration of cars from gasoline to electric?

 

[foxfirev5]

I don't see the comparisons to the early '80s. We are currently at near zero interest rates for savings. While I had a mortgage of 18%+ on my newly built home in Aug 1981, Aunt Sadie had nearly 15% treasuries to live on. Heck even back in 1975 I had T Notes with 6% interest. The spread between inflation and savings rate is now huge. How does comparing today to the earlier time have any relevance?

 

[Turtle]

What is the definition of a free market? It seems that the Fed works in concert with the largest banks not just in the USA either which still surprises me to benefit wall street. It's been an eye opener to try to follow Wall Street On Parade ~ A Citizens Guide to Wall street https://wallstreetonparade.com/ It's a heart stopper. It attempts to help citizens understand how complex it is and such.

 

[copyright1997reloaded]

This may be covered in other threads, but this seemed a convenient place to mention. The nickel market -- London Metal Exchange or LME -- has become a somewhat interesting story since this post. A certain trader who had a short position is multi-billion in the hole. Some trades were backed out & the market closed for indefinite period. Last I heard until 'sometime next week'. Not unlike when there was a similar case for tin market in 1980s; that market was closed for over 4 years.

Today tesla announced price increase that I understand was due to price of nickel. Complicates the migration of cars from gasoline to electric?

"If you don't physically posses it, you don't own it".

It makes one wonder whether having ETF's like GLD, SLV, other funds that represent physical things is really the same as having those physical things.

 

[copyright1997reloaded]

Laughable.

In what sense?

 

[luckydude]

"If you don't physically posses it, you don't own it".

It makes one wonder whether having ETF's like GLD, SLV, other funds that represent physical things is really the same as having those physical things.

I would say they are not the same. Owning financial instruments investing in, say gold, is very different from possessing the physical gold and being able to transport/dispose of it as you please. The former is purely an investment diversification/hedge. The latter is both an investment diversification/hedge as well as a useful store of value in a SHTF type calamity (along with food, guns, ammos, etc.).

 

[pb4uski]

In what sense?

This.

Following Fed for over 40 years now, I've come to realize they're just another political arm. Big shots coming in from Wall Street or Yale or Harvard to run it, appointed by both sides over the years, and not ONE understands true economics, goods and services, supply and demand. Hideous.

 

[razztazz]

Following Fed for over 40 years now, I've come to realize they're just another political arm. Big shots coming in from Wall Street or Yale or Harvard to run it, appointed by both sides over the years, and not ONE understands true economics, goods and services, supply and demand. Hideous.

So, if the Keepers of the Discipline (Harvard/Yale types) and the Practitioners of the Discipline (Wall Streeters) don't know anything about true economics etc etc, who on earth would?

PS I agree The Fed is at least quasi-politicized but they didn't hatch from an egg or beam down from the 5th Dimension. They get appointed by elected officials.

 

[dtbach]

After years of studying Economics...one of the things I learned, when it comes to the Fed, their actions will always be either not enough or too much...and always too late.

Centralized government control of any economy, will never be able to outsmart the free market. The Fed is only making worse the conditions created over the last 2 years by well-meaning, but ill-informed people.

The "free market" caused the supply bottlenecks. Shouldn't "they" have seen the increased demand and added the work shifts needed?


I"ll take the Fed over having a bunch of Mega companies making economic policy.

 

[pb4uski]

So, if the Keepers of the Discipline (Harvard/Yale types) and the Practitioners of the Discipline (Wall Streeters) don't know anything about true economics etc etc, who on earth would? ...

Spot on.

 

[tmm99]

My first house mortgage was 9% back in 77, my dad was amazed and told me not to pay that much as it had to come down. Moved in 1982 and had a 16.5% mortgage!

I think our mortgage interest rate for the house we bought in 1990 or 1991 was around 10%. So easy to get used to the low-interest rates we've been having. Our current mortgage interest rate is 1.74% for our 5-year fixed (This is Canada and they don't have the 30-year fixed rate that's most prevalent in the US.)

 

[copyright1997reloaded]

So, if the Keepers of the Discipline (Harvard/Yale types) and the Practitioners of the Discipline (Wall Streeters) don't know anything about true economics etc etc, who on earth would?

PS I agree The Fed is at least quasi-politicized but they didn't hatch from an egg or beam down from the 5th Dimension. They get appointed by elected officials.

Oh, I believe they do know what they are doing (at least to a certain extent). That is what makes it even worse than incompetency.

However, I also believe that institutions of higher learning, especially in the area of Economics, have lost their way in terms of understanding fundamental economic theory. There are fundamental reasons for business cycles, for recessions, and to understand that unless risk is sometimes realized (in losses), there will be more and more speculative investment. I don't know if now is the time when the bigger price is paid, or if instead, the day of reckoning is kicked down the road.

From one of my favorite poems:

n the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

https://www.kiplingsociety.co.uk/poem/poems_copybook.htm