Start of a new era

[Mulligan]

Opinions I hear are all over the map.

If I heard him correctly, Powell seems to think that all the QT they're scheduled to do is about equal to a 1/4 point rate increase on the Fed funds rate, so it really isn't much.

Sure, it's unprecedented, but I think we understand generally what QT is going to do. The only thing we don't know for sure is how strong the effects will be. I think they'll be able to tell after a few months and then can adjust.

I'm not surprised that people aren't following Dimon like he's an oracle. I know he's a smart guy and runs a pretty large financial institution. But what is his track record on predictions? As far as I can tell, he's just one voice among many smart people, some of which are talking about market recoveries and soft landings later this year. Who knows who is right? Not me.

Well this one wasnt so great…From August 2018…

I think rates should be 4 percent today,” Dimon says. “You better be prepared to deal with rates 5 percent or higher.”
The rate on the closely followed 10-year note remains below even the 3 percent level despite Dimon’s expectations.

 

[aja8888]

Well this one wasnt so great…From August 2018…

I think rates should be 4 percent today,” Dimon says. “You better be prepared to deal with rates 5 percent or higher.”
The rate on the closely followed 10-year note remains below even the 3 percent level despite Dimon’s expectations.

We also know what happened later in 2018 (December) when the FED raised rates and the market puked. Quickly, a reverse was called for. Dimon was early with the call, but the FED eased back.

 

[Mulligan]

We also know what happened later in 2018 (December) when the FED raised rates and the market puked. Quickly, a reverse was called for. Dimon was early with the call, but the FED eased back.

We havent seen a 5% 10 year in 15 years. I think he is still way early. But Gundlach said 6% at same time, so Dimon had a better prediction!

 

[Koolau]

We havent seen a 5% 10 year in 15 years. I think he is still way early. But Gundlach said 6% at same time, so Dimon had a better prediction!

By the way, here are some of the folks I've now seen agreeing with Dimon about the coming Hurricane - or at least addressing today the current serious issues of the economy.

Bob Nardelli - former Chrysler and Home Depot CEO
Elon Musk - apparently looking to shed 10% of workers
Gary Friedman of Restoration Hardware
John Waldron pres Goldman Sachs
Larry Summers former Treas. sec.

Then again, I hear Walmart and Ford are bullish so YMMV.

 

[copyright1997reloaded]

I don't have a model for the economy and it sounds like most of this QT discussion is anxious guessing. Today the unemployment rate reported as steady at 3.6%. That is not a situation that is associated with recessions. Really bad (sustained declining) markets are associated with recessions.

If the unemployment rate moved up to the late 2021 numbers that would be a bad sign when coupled with a declining SP500.

Repeat after me: "Employment is a lagging indicator". When you see the unemployment rate starting to move up (considerably), we will have already been in recession.

In the 2007-2010 saga, the recession officially started Dec 2007, but the unemployment rate didn't start moving much until May 2008.

https://fred.stlouisfed.org/series/UNRATE

 

[Graybeard]

So I have a question. With the Fed raising (or expected to be raising) the FOMC rate over the next several months, that will (should) cause interest rates to rise, I am specifically thinking about Treasuries in this post. But with QT they are selling bonds, extra bonds in the market means more supply (of bonds to be bought by some entity) and that would mean the price would (should) drop causing interest rates on Treasuries to increase. Am I right so far?

I ask because I want to buy Treasury bills over the next couple of years vs having money in bond funds and it seems the coupons on 13, 26 and 52 week bills will be rising as they go further month by month with QT. If all that is true then not jumping in all at once or say over the next couple of months would allow me to buy bills with a higher coupon at a lower price.

While no one knows what will happen, does this make sense or is it dirty rotten market timing?

 

[corn18]

So I have a question. With the Fed raising (or expected to be raising) the FOMC rate over the next several months, that will (should) cause interest rates to rise, I am specifically thinking about Treasuries in this post. But with QT they are selling bonds, extra bonds in the market means more supply (of bonds to be bought by some entity) and that would mean the price would (should) drop causing interest rates on Treasuries to increase. Am I right so far?

I ask because I want to buy Treasury bills over the next couple of years vs having money in bond funds and it seems the coupons on 13, 26 and 52 week bills will be rising as they go further month by month with QT. If all that is true then not jumping in all at once or say over the next couple of months would allow me to buy bills with a higher coupon at a lower price.

While no one knows what will happen, does this make sense or is it dirty rotten market timing?

When demand goes down, prices for bonds goes down and the yield goes up. So when the fed starts selling its bonds, the yield will go up not down.

So you are spot on.

 

[daylatedollarshort]

Just tonight I saw someone from one of the big brokerage houses suggesting that, not only was Dimon right that a hurricane is coming - but it's gonna be a Cat 5. Wish I could recall the details (which guy/which house.) YMMV

Most of the experts have predictions along the same lines - Jeremy Grantham, Michael Burry: Market Gurus Predict Stocks Plunge (businessinsider.com)


I like TIPS so I'm pretty happy about TIPS yields going up. A 1.3% real yield on TIPS provides a 4% safe withdrawal rate over 30 years with the relative safety of Treasuries. We're good with that but are hoping for even higher real yields. Right now our older TIPS are making more than current I bonds because the TIPS have real yields of 0 - 3%. I sold the bond funds earlier in the year and switched the stocks to a Vanguard High Dividend fund that is only down 3.49%, so that hasn't been too bad. I'll DCA stocks when the S&P hits a 40% drop. I think there will be a big stock market plunge, substantial increase in interest rates and continued inflation, but I feel like we're positioned to come out just fine. We refinanced the mortgage last year so we have that low rate locked in and can invest the difference for the next 29 years.

 

[SecondCor521]

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.

In fact, in terms of degree, he also said in nearly the same breath: "We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself." (https://www.forbes.com/sites/jackke...ne-coming-our-way-heres-what-you-need-to-know)

It's kinda like me saying that I'm feeling sure that someone on this board is going to have something really good happen to them sometime soon. There's enough people on here and "soon" is vague enough and enough good things happen that I'll probably be right even though I am making a random prediction.

And if nothing good happens to someone here sometime soon, y'all have enough going on that you'll probably not remember that I made a prediction that didn't actually come true. Same for Dimon - if nothing bad happens that he can call a "hurricane", people probably won't care or notice. Win/win for him in the prediction game.

 

[daylatedollarshort]

We do know that the real interest rate on federal funds is -5% (6.3% CPI inflation, .75% - 1% federal funds rate). Historically, the federal funds rate has to be equal to 2% above the inflation rate to bring inflation down. The Fed has said they will rise interest rates 6 - 7 time this year. We've seen the impact of 2 rate increases with probably 4 more to go, which likely means a further drop in bond prices, an increase in interest rates and more investors moving from stocks to fixed income as rates go up and possibly a recession. Inflation is likely to be persistent despite the rise in interest rates because of the issues with food (drought / Ukraine), oil and Covid which are beyond the control of the Fed.

Fed minutes: May 2022 - Monetary policy may move into restrictive territory (cnbc.com) -
Fed minutes point to more rate hikes that go further than the market anticipates

 

[MichaelB]

So I have a question. With the Fed raising (or expected to be raising) the FOMC rate over the next several months, that will (should) cause interest rates to rise, I am specifically thinking about Treasuries in this post. But with QT they are selling bonds, extra bonds in the market means more supply (of bonds to be bought by some entity) and that would mean the price would (should) drop causing interest rates on Treasuries to increase. Am I right so far?

I ask because I want to buy Treasury bills over the next couple of years vs having money in bond funds and it seems the coupons on 13, 26 and 52 week bills will be rising as they go further month by month with QT. If all that is true then not jumping in all at once or say over the next couple of months would allow me to buy bills with a higher coupon at a lower price.

While no one knows what will happen, does this make sense or is it dirty rotten market timing?

The Fed is not selling bonds. The Fed will just redeem bonds as they mature. As the US Treasury sells new bonds to pay, they will need to find buyers other than the Fed, but the supply of bonds in the market remains constant.

 

[MichaelB]

Jamie Dimon’s statement that he worries about the economy is self-serving. His bank has been on the receiving end of a decade of easy money with very low risk, where the Fed has done the hard work of risk management and the banks (and other financial institutions) have taken all the credit and reaped the rewards.

These same banks now face an economy where they have to manage risk without the assurance of a Fed backstop and they're frightened. Have they forgotten how to compete? Managing risk is the critical success factor of a successful bank, and Mr. Dimon is trying to lower expectations for his own performance.

 

[SecondCor521]

Historically, the federal funds rate has to be equal to 2% above the inflation rate to bring inflation down.

I've seen several people say this (or a variation of this) several times on several forums, and I would like to read more about it. Do you happen to have a cite?

 

[daylatedollarshort]

I've seen several people say this (or a variation of this) several times on several forums, and I would like to read more about it. Do you happen to have a cite?

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.

 

[Ramen]

OK, I'll admit much of this is above my comprehension level but what does this mean for the ordinary investor . . . ?

Seems to me that the only constants in any market are fear and greed. For every spooked seller, eventually there will be an opportunistic buyer. For ordinary investors, it seems to follow that a steady and diversified portfolio will survive, if not always thrive, as long as basic human nature holds. Is this too naive?

 

[aja8888]

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.

 

[daylatedollarshort]

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?

 

[aja8888]

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.

 

[daylatedollarshort]

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.

 

[Markola]

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.

 

[aja8888]

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).

 

[corn18]

Here's a look at inflation vs. fed funds rate:

 

[Markola]

^^^^^. 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.

 

[Helen]

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.

 

[Mulligan]

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.