Future of Economy and Inflation

[Markola]

Don’t we elect congress and a president to figure that out?

Yes, exactly. Both parties give us precisely what we ask for as a collective people: Lots of government on an installment plan.

 

[HarryHawk]

"People tend to get the politicians and the fishing tackle they deserve" - John Gierach, Fishing Bamboo

 

[copyright1997reloaded]

Not sure I would call it pounded, just yet.
But who knows....

First, I would say a linear chart is meaningless. So, to show things accurately, the chart should be log and should be adjusted for inflation.

Secondly, you have no idea of my positioning, or my long term view on equities. As I've mentioned, while I've been saying and still believe we are heading into hard times, I also stated I think the Fed (and others) will abandon the "dual mandate" to prioritize jobs over inflation. That means I need to be invested in things that have a chance to do decently in an inflationary environment - and to me that includes equities. So I continue to have serious coin invested in stocks.

Finally, we are here in this "Active Investing" area to chat about what we might think will happen, and how to actively navigate it. That nice little graphic of yours might not look so great with a 50% drawdown from peak (ala 2008)

 

[RetireBy90]

I think the Fed will increase rates to 3% maybe 3.5% and keep it there until inflation is beaten down.
I think Congress doesn't mind, as they all know the plan and probably have liquidated most/all stock holdings, so if the market falls 50% it won't hurt. Then they can buy back just before the Fed stops increasing the rate.

I tend to agree With this Fed comment, however the rest I don’t. Remember midterm elections this year. If we have inflation continue at 8% or so, or we continue with market drop, or enter recession there will be quite some pressure to get economy and inflation back on track. The voters will vote with wallets and will punish those in office if personal finances are worse than 2 years ago. Just one small voice.

Edited to add: I think Fed will try to keep rates up but will find it hard as the reasons for inflation won’t go away overnight. Commodities will race ahead with shortages from Ukraine, govt continues policies and rhetoric against oil and nat gas so less drilling, and China lockdowns.

 

[Magus]

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.

The laffer curve really means only spending can significantly address the debt and debt ratios. Yes, they could go up marginally, but only so much. Spending has increased well above GDP for as long as most of the country has been alive. Higher inflation actually does help get us out of debt, as long as politicians don't use it to double down on more spending (which is why I am not in favor of most tax increases which are always tied to more spending). Doing all 3 (raising taxes modestly, cutting spending modestly, and inflating / growing GDP) would have a huge impact collectively but odds of that happening: slim

 

[GTFan]

QE (creating money out of nowhere) can also address the debt, and has. It has a lot of side effects of course.

This is what I was talking about earlier WRT debt and the USD - we own the world's currency and as long as they don't think it's losing worth we can buy back as much as we want, subject to the side effects.

I also don't think the current inflation has anything to do with long-term QE, somebody prove me wrong. To me spending that created the debt is the main culprit, not the buybacks.

https://finance.yahoo.com/news/warr...will-never-default-on-its-debt-185105213.html

 

[daylatedollarshort]

A former Fed official said he would not be surprised if the Federal funds rate went up to 5 or 6% in a few months: "He notes that average hourly earnings rose 5.5% in the 12 months through April. Assuming productivity growth of 1.5% to 2%, that implies inflation of 3.5% to 4%, and it could easily run higher, Dudley said.

Fed Funds at 5% to 6%

"And that in turn suggests fed funds need to go much higher than 2% to 3%. “Now I’m 4% to 5% and it wouldn’t shock me if I’m 5 to 6 a few months from now,” Dudley said in a separate interview with Bloomberg."

https://www.thestreet.com/markets/rates-bonds/former-official-dudley-fed-policy-6pct-interest-rate

With over a -7% gap between inflation and the current Federal funds rate, this is seems like the logical course of action, but I suspect the current Fed members don't want to admit it yet because it would acknowledge that they have been doing too little, too late.

 

[Markola]

QE (creating money out of nowhere) can also address the debt, and has. It has a lot of side effects of course…

I also don't think the current inflation has anything to do with long-term QE, somebody prove me wrong. To me spending that created the debt is the main culprit, not the buybacks.

https://finance.yahoo.com/news/warr...will-never-default-on-its-debt-185105213.html

I think you’re combining two very different matters, debt and inflation.

Something like 40% of all dollars in circulation have been created out of nothing during the last two years. There’s your inflation root. Other contributors are energy demand growing during a shooting war, tariffs from the prior and current administrations’ trade war, natural growth in other commodities’ costs during the Covid economic recovery, etc.

Our national debt is separate and the result of long-term bipartisan consensus to spend money on military and social programs without taxing Americans enough to pay for it.

Ballooning corporate and consumer debt is the result of low interest rates for many years, which encouraged taking on the cheap debt.

 

[copyright1997reloaded]

I think you’re combining two very different matters, debt and inflation.

Something like 40% of all dollars in circulation have been created out of nothing during the last two years. There’s your inflation root. Other contributors are energy demand growing during a shooting war, tariffs from the prior and current administrations’ trade war, natural growth in other commodities’ costs during the Covid economic recovery, etc.

This.

I would even go further: Excess money in circulation IS inflation (not just a cause of inflation). It is just a question of what is inflated and when. Getting back to the basics, money is a medium of economic exchange (easier than bartering) and is how the value of some good/service being exchanged is expressed. It is also a storage of wealth, i.e. deferred consumption.

So, when (as the above) the money supply is increased dramatically, it can either be spent or "saved" (to be used for goods/services later) in some fashion. It might be kept as is (i.e. as currency or the digital representation of currency), or it might be converted to real good (e.g. housing) or kept in some other fashion (bonds, stocks, crypto, etc.)

To go along with the huge increase in the money supply, we (i.e. the government) also caused things to spend that money on (especially services) to be drastically reduced, thus even more changing the balance between the supply of money and the supply of stuff to spend that money (deferred spending) on.

At first, the money (mostly) went to deferred spending. The personal savings rate in the USA went from 8.3% in Jan 2020 to 33.8% in April 2020. It remained above 8.3% all the way until Sept. 21, at which point people have been SPENDING that deferred wealth. After dropping immediately during the beginning of the pandemic, there was also a large increase in the Gross Private Domestic Investment numbers.

All we need to see (certainly in retrospect) is that people took that money and bought things - at first deferred things (stocks, bonds) and things they could get (houses, cars, ...) and now that excess money is "inflating" the prices across the spectrum. There will be more to come...while wages have trailed inflation, we are starting to see wage-price inflation move into the service sector (so this isn't supply chain issues). In the latest report (April 29), service sector wages were up 1.4% for 3 months, 4.4% YoY. If anything, inflation is "broadening out" throughout the economy.

 

[Sunset]

A former Fed official said he would not be surprised if the Federal funds rate went up to 5 or 6% in a few months: "He notes that average hourly earnings rose 5.5% in the 12 months through April. Assuming productivity growth of 1.5% to 2%, that implies inflation of 3.5% to 4%, and it could easily run higher, Dudley said.

Fed Funds at 5% to 6%

"And that in turn suggests fed funds need to go much higher than 2% to 3%. “Now I’m 4% to 5% and it wouldn’t shock me if I’m 5 to 6 a few months from now,” Dudley said in a separate interview with Bloomberg."

https://www.thestreet.com/markets/rates-bonds/former-official-dudley-fed-policy-6pct-interest-rate

With over a -7% gap between inflation and the current Federal funds rate, this is seems like the logical course of action, but I suspect the current Fed members don't want to admit it yet because it would acknowledge that they have been doing too little, too late.

They did it before, anyone remember the 16% mortgages around 1980 ? That will cool off the housing market I think...

It will be a great time to buy long term CD's at 13%

 

[GTFan]

I think you’re combining two very different matters, debt and inflation.

Debt and inflation are directly related when excess spending drives both of them. We have indeed been creating money out of nowhere with no real intent to pay down (reduce) the supply via taxation or belt tightening.

So far, the world does not seem to care that there are trillions more dollars out there.

 

[aja8888]

They did it before, anyone remember the 16% mortgages around 1980 ? That will cool off the housing market I think...

It will be a great time to buy long term CD's at 13%

I moved from Connecticut in 1981 to Los Angeles (job transfer). Best mortgage I could get was 18%. Bought a house at the bottom, but the mortgage payment was gigantic! Refinanced a couple of years later at 10% and thought I died and went to Heaven.

 

[Closet_Gamer]

So far, the world does not seem to care that there are trillions more dollars out there.

Yes, I find it interesting that against all of this backdrop, the dollar is strengthening against the world's major currencies.

 

[Magus]

This.

I would even go further: Excess money in circulation IS inflation (not just a cause of inflation). It is just a question of what is inflated and when. Getting back to the basics, money is a medium of economic exchange (easier than bartering) and is how the value of some good/service being exchanged is expressed. It is also a storage of wealth, i.e. deferred consumption.

So, when (as the above) the money supply is increased dramatically, it can either be spent or "saved" (to be used for goods/services later) in some fashion. It might be kept as is (i.e. as currency or the digital representation of currency), or it might be converted to real good (e.g. housing) or kept in some other fashion (bonds, stocks, crypto, etc.)

To go along with the huge increase in the money supply, we (i.e. the government) also caused things to spend that money on (especially services) to be drastically reduced, thus even more changing the balance between the supply of money and the supply of stuff to spend that money (deferred spending) on.

At first, the money (mostly) went to deferred spending. The personal savings rate in the USA went from 8.3% in Jan 2020 to 33.8% in April 2020. It remained above 8.3% all the way until Sept. 21, at which point people have been SPENDING that deferred wealth. After dropping immediately during the beginning of the pandemic, there was also a large increase in the Gross Private Domestic Investment numbers.

All we need to see (certainly in retrospect) is that people took that money and bought things - at first deferred things (stocks, bonds) and things they could get (houses, cars, ...) and now that excess money is "inflating" the prices across the spectrum. There will be more to come...while wages have trailed inflation, we are starting to see wage-price inflation move into the service sector (so this isn't supply chain issues). In the latest report (April 29), service sector wages were up 1.4% for 3 months, 4.4% YoY. If anything, inflation is "broadening out" throughout the economy.

Bingo -and imported goods into the US is much higher than pre-pandemic so its not the supply chain itself that's the problem, largely demand for goods caused by a 40% increases in the money supply in the US (elsewhere similar) and even larger wealth effect. The real story of this pandemic in 100 years may not be the pandemic itself which won't even break into the top 25 causes of death globally for the last two years, but the shutdown and the massive government and central bank spending, the after-math, and how they handled that aftermath (inflation, inventory issues, labor issues) and what came next. We're in unchartered waters here - and who knows what happens if the Fed Reserve really does start actually withdrawing $100B of liquidity a month like they say they will next month. All the market declines so far this year are with 75 basis point increase in the short part of the debt curve.

 

[Magus]

Yes, I find it interesting that against all of this backdrop, the dollar is strengthening against the world's major currencies.

Most other central banks and governments did the same thing. And the US economy has rebounded significantly more from the March-April 2020 bottom than nearly every country on earth, which combined with higher yields in the US -> inflow into Dollars.

 

[Magus]

They did it before, anyone remember the 16% mortgages around 1980 ? That will cool off the housing market I think...

It will be a great time to buy long term CD's at 13%

Housing market kept rising in the late 70s and early 80s so I wouldn't bet on that. (agreed on CDs at 13% would be juicy but think thats unlikely - US gov debt level is significantly higher than 1980 as a % of GDP)

 

[ejman]

Most other central banks and governments did the same thing. And the US economy has rebounded significantly more from the March-April 2020 bottom than nearly every country on earth, which combined with higher yields in the US -> inflow into Dollars.

Yes, very interesting to read the level of bashing on our economic policies during this Covid era when many of the other developed countries have done even worse. No wonder the dollar keeps gaining against most other currencies [mod edit]

 

[Popeye]

Yes, very interesting to read the level of bashing on our economic policies during this Covid era when many of the other developed countries have done even worse. No wonder the dollar keeps gaining against most other currencies [mod edit]

I think the US economy was also in a much stronger position going into the pandemic era which enabled the US to weather the storm better.

And now the are non Covid risks 5hat threaten other economies more than the US.

 

[NW-Bound]

I moved from Connecticut in 1981 to Los Angeles (job transfer). Best mortgage I could get was 18%. Bought a house at the bottom, but the mortgage payment was gigantic! Refinanced a couple of years later at 10% and thought I died and went to Heaven.

Bought my 1st home in April 1980, and paid 14% on an FHA mortgage. I don't remember if the 1/2% mortgage insurance was on top of that, but that was likely.

The house payment took one of my bi-weekly paychecks. We survived somehow, and that was the best time in my life being just married.

I refinanced twice prior to selling the home in 1988, but don't remember the rates of the later mortgages. I still have the mortgage paperworks in the file cabinet upstairs. May look at them one of these days.

 

[Carbon8]

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

Several problems have been involved to bring us to where we are today... we have a worker shortage;

I believe the labor shortage is beginning to take care of itself. In recent days WMT and TGT identified over-hiring as a cost issue in their earnings reports with indications that they have or will be making reductions. Additionally, companies like NFLX, HOOD and other "growth" companies have already announced initial rounds of layoffs. In addition to the dozens of publicly traded growth companies that need to rein in expenses there are 1000s of pre-IPO companies that will have to go through the same exercise because their private investors will require them to conserve cash.

Most of those workers will end up taking the jobs that are going unfilled now. Perhaps a lucky few will end up here.

I agree with many previous responses on this thread that we have seen this movie before. We don't necessarily know all the plot twists, but it ends with markets figuring it out in the end. (Of course we also don't know the runtime of this version of the movie. Is it the market equivalent of 90 minutes or 230?)

 

[Dash man]

I believe the labor shortage is beginning to take care of itself. In recent days WMT and TGT identified over-hiring as a cost issue in their earnings reports with indications that they have or will be making reductions. Additionally, companies like NFLX, HOOD and other "growth" companies have already announced initial rounds of layoffs. In addition to the dozens of publicly traded growth companies that need to rein in expenses there are 1000s of pre-IPO companies that will have to go through the same exercise because their private investors will require them to conserve cash.

Most of those workers will end up taking the jobs that are going unfilled now. Perhaps a lucky few will end up here.

I agree with many previous responses on this thread that we have seen this movie before. We don't necessarily know all the plot twists, but it ends with markets figuring it out in the end. (Of course we also don't know the runtime of this version of the movie. Is it the market equivalent of 90 minutes or 230?)

Hopefully it’s not “Gone With the Wind.”

 

[HarryHawk]

https://www.barrons.com/articles/gasoline-prices-how-high-51652816252

Gasoline prices in the U.S. could climb above $6 this summer because the level of gasoline in storage has dwindled just as more Americans take to the road, according to Natasha Kaneva, head of global commodities research at J.P. Morgan . Prices at the pump are already at record highs, averaging more than $4.50 per gallon for the first time ever. This could be just the beginning of the increases

Diesel prices are currently higher than gas. The country runs on energy.

At the same time, we are unable to keep up with demand for electricity

https://www.bloomberg.com/news/arti...s-at-risk-of-summer-blackouts-regulator-warns

A vast swath of North America from the Great Lakes to the West Coast is at risk of blackouts this summer as heat, drought, shuttered power plants and supply-chain woes strain the electric grid.

 

[Magus]

https://www.barrons.com/articles/gasoline-prices-how-high-51652816252

Gasoline prices in the U.S. could climb above $6 this summer because the level of gasoline in storage has dwindled just as more Americans take to the road, according to Natasha Kaneva, head of global commodities research at J.P. Morgan . Prices at the pump are already at record highs, averaging more than $4.50 per gallon for the first time ever. This could be just the beginning of the increases

Diesel prices are currently higher than gas. The country runs on energy.

At the same time, we are unable to keep up with demand for electricity

https://www.bloomberg.com/news/arti...s-at-risk-of-summer-blackouts-regulator-warns

A vast swath of North America from the Great Lakes to the West Coast is at risk of blackouts this summer as heat, drought, shuttered power plants and supply-chain woes strain the electric grid.

I hope these articles are wrong. Might end up being a summer of widespread discontent. I almost feel bad for politicians up for re-election this year!

 

[HarryHawk]

I hope these articles are wrong. Might end up being a summer of widespread discontent. I almost feel bad for politicians up for re-election this year!

I guess it depends on how much of this is self inflicted.

p.s. I just heard on the news that they are reprogramming the pumps to accommodate $10 on up gas prices.

 

[almost there]

Prem. has been over $6.00 for the past 4 months where I live.
But Calif is nuts.