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Old 06-04-2022, 10:06 AM   #41
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Originally Posted by daylatedollarshort View Post
Here is one from last year -

"There hasn’t, however, been a similar shift in how high investors expect interest rates to go. Markets still see a peak in this business cycle of less than 2%. I think there’s a good chance they’re mistaken.

Let’s start with the Fed’s own perspective. As of September, officials estimated that the “neutral” federal funds rate — the rate consistent with the central bank’s 2% inflation target — would be between 2% and 3%, already higher than market expectations. But under its new monetary policy framework, the Fed intends to allow inflation to rise above 2% to make up for previous downside misses. If, say, inflation went to 3%, the neutral rate would be 3% to 4% — and the Fed would eventually have to raise interest rates significantly higher than that to make monetary policy sufficiently tight to bring inflation back down to its long-term target." Source: The Fed Has More to Do Than the Market Recognizes - The Washington Post

My post doesn't mean the federal funds rate will necessarily go to 5%. As the Fed increases the federal funds rates, interest rates will start to drop. Maybe they will kind of meet in the middle. But most experts on economic policy, the ones who have studied or lived through the history of it, seem to agree that those kinds of increases have not yet been baked into current bond and stock market prices.

In terms of signal and the noise, right now the signals are the federal funds rate, inflation and real interest rates. The playbook is pretty specific on how those all work together. We don't always get such clear signals, but I think right now investors who ignore the Fed meeting minutes do so at their own peril.
The FED continues to ignore the Taylor Rule.
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Old 06-04-2022, 10:28 AM   #42
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The FED continues to ignore the Taylor Rule.
I looked up the Taylor rule - "Taylor's rule makes the recommendation that the Federal Reserve should raise interest rates when inflation is high or when employment exceeds full employment levels. Conversely, when inflation and employment levels are low, the Taylor rule implies that interest rates should be decreased."

How does that conflict with what they are currently doing?
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Old 06-04-2022, 10:41 AM   #43
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I looked up the Taylor rule - "Taylor's rule makes the recommendation that the Federal Reserve should raise interest rates when inflation is high or when employment exceeds full employment levels. Conversely, when inflation and employment levels are low, the Taylor rule implies that interest rates should be decreased."

How does that conflict with what they are currently doing?
TRhe Taylor Rule calculation implies that the FFR should be above the inflation rate. The FED has ignored that for quite a while now. They have made no published attempt at adhering to the formula to determine the FFR. In essence, the fed actually kept rates low and "let inflation run hot" rather than raise rates in the face of this inflation.

All the FED has accomplished in the last year + that inflation has run hot is use the "dot plot" method to choose an increase in the FFR, which has been 0.25% and 0.50% since a year ago. They, to anyone's knowledge, assessed the required interest rate rise number using the Taylor Rule.

It's all been jawboning and feeble attempts at controlling inflation while the masses are faced with rising prices everywhere.

In essence, they (FED) are "dragging their feet" with what they should be doing. However, it's readily apparent the FED has backed themselves (and us) in a corner and can't get out of this inflationary mess without causing a recession.
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Old 06-04-2022, 10:52 AM   #44
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TRhe Taylor Rule calculation implies that the FFR should be above the inflation rate. The FED has ignored that for quite a while now. They have made no published attempt at adhering to the formula to determine the FFR. In essence, the fed actually kept rates low and "let inflation run hot" rather than raise rates in the face of this inflation.

All the FED has accomplished in the last year + that inflation has run hot is use the "dot plot" method to choose an increase in the FFR, which has been 0.25% and 0.50% since a year ago. They, to anyone's knowledge, assessed the required interest rate rise number using the Taylor Rule.

It's all been jawboning and feeble attempts at controlling inflation while the masses are faced with rising prices everywhere.

In essence, they (FED) are "dragging their feet" with what they should be doing. However, it's readily apparent the FED has backed themselves (and us) in a corner and can't get out of this inflationary mess without causing a recession.

I agree they let inflation get too high when they had the power to lower it, but aren't they now making up for lost time now? Their press conferences and meeting minutes this year seem like they are stepping up now and doing what needs to be done.
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Old 06-04-2022, 11:04 AM   #45
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Market timing in such a complex, global financial system is like trying to predict which kernels in a bag of microwave popcorn will be duds.

Several recessions have taught me to put my hands in my pockets and trust that our 50/50 globally-diversified index fund portfolio, plus our home equity and other property, and our part time paid work, will somehow get us through the squalls and hurricanes.
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Old 06-04-2022, 11:04 AM   #46
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I agree they let inflation get too high when they had the power to lower it, but aren't they now making up for lost time now? Their press conferences and meeting minutes this year seem like they are stepping up now and doing what needs to be done.
Inflation is *reportedly* 8+%. So far they have raised the FFR 0.75% in the last year and are looking at a couple of 0.5% raises in the following months. Yes, they are doing something and I am sure it will be painful going forward, like a slow roasting on a spit.

Wait until mortgage interest rates go much higher and see the screaming that will happen when the inflated house prices start dropping like apples off a tree. That's what these politicians are scared of.......a quick drop in asset prices that will surely come with higher interest rates.

I don't think the politicians care about the stock and bond markets (they probably already went to cash - re. two FED governors quietly resigned over their insider trading last few months).
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Old 06-04-2022, 11:12 AM   #47
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Here's a look at inflation vs. fed funds rate:

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Old 06-04-2022, 11:20 AM   #48
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^^^^^. Official, politically-gerrymandered CPI, you mean? With 40% of all dollars in circulation having been spun out of the ether during the last two years, I can’t rationally believe in CPI. True inflation is a lot worse.
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Old 06-04-2022, 11:36 AM   #49
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The impact of this will be greatest on the financial economy. Hedge funds, private equity, venture capital, and the profitless tech businesses, will all suffer because they don’t produce anything of intrinsic value but they badly need more and more easy money to finance their risk investments. As the Fed withdraws cash reserves from the banking system, the funds available for these risk investments that generate no cash flow of their own will get much more costly and difficult to borrow. IMO that is good.
If hedge funds have been buying up residential real estate then perhaps they will have to unload it. This might be a good thing.
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Old 06-04-2022, 12:28 PM   #50
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Inflation is *reportedly* 8+%. So far they have raised the FFR 0.75% in the last year and are looking at a couple of 0.5% raises in the following months. Yes, they are doing something and I am sure it will be painful going forward, like a slow roasting on a spit.



Wait until mortgage interest rates go much higher and see the screaming that will happen when the inflated house prices start dropping like apples off a tree. That's what these politicians are scared of.......a quick drop in asset prices that will surely come with higher interest rates.



I don't think the politicians care about the stock and bond markets (they probably already went to cash - re. two FED governors quietly resigned over their insider trading last few months).


Concerning your higher mortgage rate thoughts. I just rolled into a 2.75% 15 yr. with no intentions of leaving. But I wonder in say 5-10 years (if mortgages stay at this level or higher) when people want to “move up” or “on” will these people with the same low mortgages get “trapped” in their present house?
Unwilling to give up a sub 3% note for a 5.5% or 6%? It sure would make me think twice.
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Old 06-04-2022, 01:06 PM   #51
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The Feds policy reminds me of the old Air Force saying. "Measure it with a micrometer, mark it with a pencil and cut it with an ax"
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Old 06-04-2022, 01:11 PM   #52
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Concerning your higher mortgage rate thoughts. I just rolled into a 2.75% 15 yr. with no intentions of leaving. But I wonder in say 5-10 years (if mortgages stay at this level or higher) when people want to “move up” or “on” will these people with the same low mortgages get “trapped” in their present house?
Unwilling to give up a sub 3% note for a 5.5% or 6%? It sure would make me think twice.
I'm sure that will happen. A lot of folks either bought a house or refinanced it for some really low rate. A friend of mine is a mortgage broker and during the height of all this madness told me he had 80 refi applications pending at once.

I suspect those with low interest loans will stay put as long as they can when rates go up. Heck, they are 5+% already and the real fireworks have not started yet!

Couple the low rates with a big loss in home value that will be coming and some of these folks with mortgages may become underwater with their loan.
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Old 06-04-2022, 01:14 PM   #53
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If hedge funds have been buying up residential real estate then perhaps they will have to unload it. This might be a good thing.
You’re right that it would be a good thing. I fear it will not happen, or at least they will dump other assets first, because residential real estate generates cash flow, and they first will be exiting investments that generate no cash.
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Old 06-04-2022, 01:39 PM   #54
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You’re right that it would be a good thing. I fear it will not happen, or at least they will dump other assets first, because residential real estate generates cash flow, and they first will be exiting investments that generate no cash.
Funny thing about when assets are dumped: When things are going bad, good assets get dumped...because they can be (i.e. they provide liquidity in exiting). But I would agree, it usually is delayed, thus "Eventually the generals get shot".
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Old 06-04-2022, 02:15 PM   #55
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Here's another issue I have with the Dimon quote: What does he mean by "hurricane"? It's a term that could mean any sort of moderately bad thing...is it really high inflation? Job layoffs? GDP contraction? Bitcoin failing? More supply chain issues? It could be any of those or any number of other things, of any moderately bad degree for any duration of time sometime in the near future.
Let's face it - Dimon nor anyone else knows exactly what's gonna happen. He just believes its gonna be "bad." How bad? He doesn't know - just like you don't know how bad a hurricane is gonna be. You just know it's gonna be worse than "business as usual." He could have used any number of other more or less nebulous terms: Train wreck. S/// show. Cluster Flop. Etc.

I just watched Dimon explain what HE meant by a hurricane. It's like when a hurricane's coming and you don't know it. The weather might be bright and sunny, you go to the beach, you don't know to take cover and then the hurricane hits. It takes you by surprise. So jobs are good. The economy is still reasonably strong. People have savings. But what's it gonna be like in 6 months. Don't know, but I'm betting its gonna be worse. Dimon think it's gonna be "bad." How else should he say it than hurricane? He doesn't know what the inflation rate will be. He (nor anyone else) knows what unemployment will be. He (nor anyone else) knows what the stock market is going to be doing.

SO, yeah, "hurricane" isn't precise - but then again, there's no way to predict a hurricane and that's what he's suggesting about the economy.

Do you have a better term that covers the concept of "now it's good but soon it won't be" in terms of the economy. I don't know a financial term that one would use that describes the uncertainty of the outcome but the near certainty (in Dimon's mind) that it's coming. YMMV
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Old 06-04-2022, 02:48 PM   #56
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Let's face it - Dimon nor anyone else knows exactly what's gonna happen. He just believes its gonna be "bad." How bad? He doesn't know .......
I was reading portions of this news article about Jamie Dimon to my husband and then laughed out loud when I saw this headline in the next article:

"Elon Musk has 'super bad feeling' about economy...." Um.... Super Bad? !!

Of course, then next headline read something to the effect of "Bear Market Bottom reached, markets heading back up"

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Old 06-04-2022, 02:55 PM   #57
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I was reading portions of this news article about Jamie Dimon to my husband and then laughed out loud when I saw this headline in the next article:

"Elon Musk has 'super bad feeling' about economy...." Um.... Super Bad? !!

Of course, then next headline read something to the effect of "Bear Market Bottom reached, markets heading back up"

Yes, Elon Musk is feeling "Super Bad" enough to shed 10% of his work force. I think that counts as "super bad"
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Old 06-04-2022, 03:03 PM   #58
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Agree Dimon can’t know for sure, so his “hurricane” is a Rorschach test for us to paint our fears on. What we know includes:

Tech has been dragging the rest of the S&P up for years but now tech has nosedived.

Inflation is hitting even G20 economies hard while real interest rates are still nearly essentially negative.

However, though Central bank tightening is underway rate hikes can only be modest and symbolic, compared to inflation, without causing a recession, since the economy is addicted to easy money.

Oil, wheat, nickel and more commodities are threatened by the shooting war in Europe.

Parts of the world’s manufacturing center, China, has been locked down.

Covid is not done with us.

The most terrifying of all is that Jim Cramer tweeted yesterday that we won’t have a recession. Twitter reacted that his statement means one is guaranteed, LOL. https://twitter.com/jimcramer/status...16862182092800
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Old 06-04-2022, 03:06 PM   #59
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Yes, Elon Musk is feeling "Super Bad" enough to shed 10% of his work force. I think that counts as "super bad"

I thought it was just 10% of the "salaried" work force, but some sources haven't mentioned that.
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Old 06-04-2022, 03:14 PM   #60
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I thought it was just 10% of the "salaried" work force, but some sources haven't mentioned that.
The tweet I read said salaried only. Explicitly mentioned was the people on production weren't being cut.
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