Future of Economy and Inflation

[NW-Bound]

CATL, who is the largest Chinese EV battery maker with 35% world market share and who is supplying LFP cells to Tesla China factory, reported earnings yesterday. Its stock promptly lost 14%, because profits fell 41%.

CATL blames the problem on the high cost of materials, even though the LFP (lithium ferrous phosphate) cell chemistry makes no use of nickel and cobalt, which is used in other lithium cell chemistries for EVs and electronics.

 

[aja8888]

I have read that historically interest rates needed to go above the inflation rates in order to reduce inflation. With the one year Treasury at 2% and last inflation figures at 8.5%, that is a -6.5% real interest rate on the 1 year Treasuries. Based on that, I have been thinking it is quite possible we haven't seen anything yet on how high the Fed will eventually need to raise rates to get inflation under control.

Exactly, as Volcker raised the rates in 1981 to 20% which was over the inflation rate at the time. That killed inflation, put a lot of people our of work, and cause a recession. The FED now has itself backed into the same corner but would rather see the U.S. population and small business slowly roasted over a fire pit for the next several years (or longer) rather than tackle the inflation they created through the 12 years of QE.

 

[luckydude]

Some thoughts to consider:

1. The FED policy moves are reactionary and since the Volcker years, have not been aggressive in addressing inflation.

2. When inflation reared its ugly head over a year ago, the FED insisted it was "transitory" and they would "let inflation run hot" for the time being. Thses statements by Powell have been published thousands of times in the media.

3. 400 PhD economists at the FED were wrong came to that conclusion (see 2. above).

4. Inflation was well underway before the Ukraine invasion.

5. Releasing crude oil out of the SPR is a political event as that oil takes months to get sold and into the "system". Actually, some of that oil was sold to foreign interests.

6. On a inflation adjusted price, our fuel products in the U.S. are not out of line.

7. With a few exceptions, the U.S. currently has fairly low fuel costs verses the rest of the world.

8. The FED's actions are meant to keep inflation going as long as it can to reduce the balance sheet debt (roughly $6 Trillion) and minimize the chance of the Democrats losing power in November's elections.

9. Who is currently getting the shaft with this high inflation are families on fixed incomes and small businesses who have no pricing power.

10. Keep your head down and keep thinning the cabbage (said to me in 1981 by a Japanese friend who's U.S. family was interned during WWII).

11. The short covering rally yesterday is over.....

12. None of the above is about you on a personal basis.

+1000. Totally spot on.

 

[Qs Laptop]

Actually releasing some oil from the U.S. Strategic Petroleum Reserve does put downward pressure on the price of gas and oil meaning less inflation.

There is lots there, and it will be replaced in a year or two or three when prices are LOWER again... So it's like buy low and sell high.

The Biden administration announced today that they would start buying back oil for the strategic petroleum reserve. They plan to do the buying this Fall. I don't think oil prices will be lower in 4 months, but I suppose they could be.

 

[gcgang]

As mentioned earlier, Debt is now 124% of GDP. I think the conventional wisdom is at over 100% your economy is in trouble.

Three ways out.
1). Run a surplus to pay down debt.
2. Default.
3. Inflate it away. Debase the currency, hold interest rates at negative levels, inflated nominal GDP can eventually overtake Debt.

I bet the US Government chooses #3.

Strap in for the inflationary ride.

 

[JDARNELL]

Exactly, as Volcker raised the rates in 1981 to 20% which was over the inflation rate at the time. That killed inflation, put a lot of people our of work, and cause a recession. The FED now has itself backed into the same corner but would rather see the U.S. population and small business slowly roasted over a fire pit for the next several years (or longer) rather than tackle the inflation they created through the 12 years of QE.

We have a winner! That is what I am seeing also. Today I was out riding and I saw several local mom and pop stores that are having 50% off going out of business. These appear to be long term family business in a tourist area that are hanging it up.

 

[RetireBy90]

As mentioned earlier, Debt is now 124% of GDP. I think the conventional wisdom is at over 100% your economy is in trouble.

Three ways out.
1). Run a surplus to pay down debt.
2. Default.
3. Inflate it away. Debase the currency, hold interest rates at negative levels, inflated nominal GDP can eventually overtake Debt.

I bet the US Government chooses #3.

Strap in for the inflationary ride.

I’ll vote for #3, too much cash in the system for too few goods or services, and too few workers to change that. MD dropped gas tax for couple months and is considering more, CA is debating a gift card to all as an offset to higher gas prices, although tax there is twice the rest of states. More money sloshing around with no supply to soak it up, lemme think, inflation?

We took out a long term 2 3/8% mortgage precisely to counteract this. My $2,800 pay,ent will take less and less of our pensions the longer this continues. I DON’T WANT this but we prepared for it. My buddy has a pension from IBM he has been drawing for 25 years with no COLA adjustments. He has taken care with his savings but these are the ones that will suffer. Buy friskies stock!

 

[frayne]

OK, so what if debt is 124% or 400% of GDP for that matter ? GDP doesn't pay down the debt, only increased tax rates/base and cost effective responsible spending from Congress will. I realize growing GDP is an important component for enlarging tax revenues but in and of itself, the metric means nothing until spending is addressed. Tell me I'm wrong.

 

[RetireBy90]

OK, so what if debt is 124% or 400% of GDP for that matter ? GDP doesn't pay down the debt, only increased tax rates/base and cost effective responsible spending from Congress will. I realize growing GDP is an important component for enlarging tax revenues but in and of itself, the metric means nothing until spending is addressed. Tell me I'm wrong.

While I agree with you, I look at it as a budget that spending is inline with income. I borrowed to by a car or house, but my monthly spend is less than or equal to my income. If you don't have that balance then as a person you can:
1) Decrease spending

2) Increase income
3) Become bankrupt


As a country you can
1) Decrease spending, that is cut programs or at least stop the annual increases
2) Increase income, that is higher tax rates or higher income to increase taxes. An increase in GDP can increase tax base if you don't adjust rates higher.

3) Let inflation do the work. Your $7T of debt over a period of years will deflate to 2002 dollars that you can manage to pay interest on.

 

[GenXguy]

Plenty of doom and gloom out there.

"‘We are nowhere near the bottom,’ top economist says as global markets crater"

https://www.cnbc.com/2022/05/06/now...-economist-says-as-global-markets-crater.html

 

[Aerides]

Plenty of doom and gloom out there.

Too say nothing of in this thread...

 

[NW-Bound]

More than inflation, in other threads we also talk about shortage of water in the West due to the drought, and very likely power shortage in California this summer.

It's bleak.

 

[GenXguy]

More than inflation, in other threads we also talk about shortage of water in the West due to the drought, and very likely power shortage in California this summer.

It's bleak.

Yeah, we could keep adding on to that list.

 

[GTFan]

While I agree with you, I look at it as a budget that spending is inline with income. I borrowed to by a car or house, but my monthly spend is less than or equal to my income. If you don't have that balance then as a person you can:
1) Decrease spending

2) Increase income
3) Become bankrupt


As a country you can
1) Decrease spending, that is cut programs or at least stop the annual increases
2) Increase income, that is higher tax rates or higher income to increase taxes. An increase in GDP can increase tax base if you don't adjust rates higher.

3) Let inflation do the work. Your $7T of debt over a period of years will deflate to 2002 dollars that you can manage to pay interest on.

Lots of people try to equate personal finances with how the US manages debt, and it's really sad how politicians always try to mislead people down that path to foster more anger.

The two have nothing to do with each other when you hold the world's default fiat currency. As long as the US dollar dominates, debt can always be handled.

 

[Freedom56]

Lots of people try to equate personal finances with how the US manages debt, and it's really sad how politicians always try to mislead people down that path to foster more anger.

The two have nothing to do with each other when you hold the world's default fiat currency. As long as the US dollar dominates, debt can always be handled.

The vast majority of the population are total disasters at managing their personal finances. Almost two thirds are living paycheck to paycheck irrespective of their income level. At some point individuals and governments hit a debt wall.

 

[almost there]

Will be interesting this time. Self inflicted inflation.
Printing $$$ for no real reason, Intentionally becoming oil dependent,
Near zero % interest for no real reason (past 10 years)
The fed at .75 as we speak.
Will see how it looks when the fed bumps its rates to 3.5% or so.
And go from there.

 

[Northforker]

The fed is limited in how high they can raise interest rates now. The federal government is so deeply in debt, they will default on their payments if they can't even pay the interest.

 

[almost there]

True, but they can stop buying debt, stop printing. And start pumping oil.
Raising int. rates is one of the few tools they have. And am sure they will at least go up another 2-3%. To fight the 7-8% they created.

 

[Beststash]

The fed at .75 as we speak.

I haven't seen that - I'm pretty sure Powell said .50 for the next couple of meetings?

If it is .75, not sure how that will be received? It might be viewed as positive or not? ?

 

[zippy2020]

Tech Stocks vs. the Fed
May 9, 2022 by an independent CFP firm

(excerpted)
... Today, we’ll focus on one that is a bit tricky to understand – the U.S. Federal Reserve (the Fed). Rates all over the economy, including for bonds, respond to the Fed rate. This year, the Fed has increased rates by 0.75% and signaled that more hikes are likely. A U.S. 10-year Treasury bond started 2022 paying 1.5% and has shot up to 3.1%.

Instead of a Treasury bond, an investor can buy a tech stock that expects no near-term profits or dividends. When rates are low, that investor foregoes little income. When rates rise, the returns must clear a higher hurdle to justify the risk.

The stock universe features a similar tradeoff. Growth stocks depend on long time horizons and exponential expansion. Other stocks feature dividends and more modest assumptions. These are often called “value stocks.”

Value stocks have held up better this year. With low rates, investors prefer stories about the future over earnings today. When rates rise, investors begin to prefer earnings today over stories about the future. Growth stocks (stories about the future) have been ascendant for well over a decade. Not coincidentally, this coincided with a historically low Fed rate.

Recently we have focused globally-diversified portfolios toward stocks that rely more on their near-term business outlook and less on stories about the future. If the Fed rate continues to elevate, this orientation can produce relatively better results, as it has so far this year.

Note that rising rates do not automatically translate to poor stock market performance. The S&P 500 has produced positive returns in every rising rate period over the last three decades. Rather, rising rates change the math behind how investors value stocks and as a result the complexion of which types of stocks perform well. Fed policy merits close attention in the coming months.

 

[SecondCor521]

I haven't seen that - I'm pretty sure Powell said .50 for the next couple of meetings?

If it is .75, not sure how that will be received? It might be viewed as positive or not? ?

The current target *rate* is 0.75%.(*) Powell said they're probably going to do 0.5% *increases* for the next two meetings. So the target rate at that point would be 1.75% (0.75% + 0.5% + 0.5%).

(*) Yeah, I know it's actually a range. Simplifying.

 

[JJpop]

So I've been thinking about the current economy and inflation.

Several problems have been involved to bring us to where we are today and where the economy will go from here. We have all the financial responses to Covid which have increased the money floating around (used to be M2); we have supply chain problems which include current closures in Asia; we have the war in Ukraine; we have a worker shortage; we have inflation and Fed raising rates and reducing it's bond holdings to fight inflation.
So what happens if the Fed tightens to address inflation but the underlying issues are still there ? I can't see how the Covid in Asia, the war, supply line problems, or worker shortages being resolved soon.
1) Does this make the Fed efforts ineffective ?
2) Does this make a recession more likely or cause the Fed to raise rates higher for inflation to fall ?

I'm curious what the body here thinks will come from this. How will the lingering problems affect the Fed's efforts and where this will leave the economy and inflation. I don't see the Fed backing off from fighting inflation after all the investment of influence and reputation. To pause and restart would not be a good response.

Where does this leave the economy and inflation ? This is purely a academic question to me. While economic conditions will affect investments I have no plan to change my investments but to stick to my AA and funds.

Thanks

Why think and worry about something not you or anybody else has an answer to?
All of this is just noise to me now.
The Fed can only do so much and they screw it up what pct of the time?

 

[copyright1997reloaded]

Lots of people try to equate personal finances with how the US manages debt, and it's really sad how politicians always try to mislead people down that path to foster more anger.

The two have nothing to do with each other when you hold the world's default fiat currency. As long as the US dollar dominates, debt can always be handled.

Ask yourself the following: You are a country that has just witnessed the following:
1) The US doing massive stimulus seemingly with no care about how much money injected (printed virtually)
2) A federal reserve that for some time seriously suggested that inflation was too low, then "transitory", and finally raised short term interest rates 0.5% with inflation raging 8+% at the consumer level and double digits at the producer level.
3) A federal reserve that, even when they saw that inflation was starting to rage, continued the frankly (..... word removed so I don't get hammered) policy of continuing to BUY assets.
4) And finally, the US Government deciding to seize another countries assets (reserves) (By the way, saying this does not make me "pro-Putin".)

So you are that country, and you ask yourself WTF? For my country, to get $ reserves (which can be grabbed anytime the US doesn't like what we do), while the US can just make money out of nothing.

I know there are reasons why the USD$ is still the reserve currency, but I got to believe that the producers of real goods and materials in the world are having some serious discussions on alternatives...

If that happens (the end of the USD$ as the reserve currency), we will look back at 8.5% CPI numbers as the "good old days".

 

[Montecfo]

Good points.

There is no real candidate to dethrone the USD as reserve currency but there could be at some point.

 

[almost there]

Agree..It looks almost intentional.