Latest Inflation Numbers and Discussion

[Chuckanut]

I think the pent-up demand is definitely there and being satisfied now. I'm not sure pandemic-saved money has much to do with American travel to Europe - folks that do that can generally afford it anyway. I think it is just reaction to the 2-year virtual ban on travel - so we're seeing 3 years of planned/hoped-for trips stacked up.
.

+1

I think people learned that if you want to go, then Go Now. Before some new disease or variant makes it harder.

 

[NW-Bound]

It will be interesting to see if when the market crashes soon as to whether or not the President will start screaming at Powell to drop rates as the previous President did. Ahh....shades of QE again?

I am not aware of any past president other than that one who was so vocal, public, and blatant about pressuring the Fed chairman. I would think a reasonable one would do it through a more courteous and private channel, and to maintain some decorum.

 

[milford]

The FED is certainly backed into a corner. They have been kicking this can down the road since 2009. But now that inflation (for whatever reason) is rearing its ugly head, the politicians are demanding it be stopped. If the FED actually paid attention to the Taylor Rule, they would raise Fed Funds Rates higher than the inflation rate. But that would kill the economy and cause a recession. So they are soft peddling the downturn of the economy with minuscule rate increases.

With QT starting, the FED will allow bonds to roll off as they mature and not reissue new ones. That will destroy liquidity in the system. The plan is to do the same with the mortgages they are paid off, but that process may take a long time. The FED has said they will sell the mortgages if need be.

QE is off the table for now as the real important politicians and FED governors have had time to get out of the equity market and a big market crash will not affect their fortunes. LOL

It will be interesting to see if when the market crashes soon as to whether or not the President will start screaming at Powell to drop rates as the previous President did. Ahh....shades of QE again?

The thing is this time we have runaway inflation so the odds of the Feds reversing policy when the market crashes is unlikely if inflation is not under control. Keep in mind inflation affects almost everyone, a recession affects a small subset of that, so it would be interesting to see which side the Feds will pick or even worst a period of stagflation.

 

[aja8888]

I am not aware of any past president other than that one who was so vocal, public, and blatant about pressuring the Fed chairman. I would think a reasonable one would do it through a more courteous and private channel, and to maintain some decorum.

I'm sure before Twitter past Presidents just called the Fed Chairman up on the phone and berated him, or just did it in person!

 

[NW-Bound]

I'm sure before Twitter past Presidents just called the Fed Chairman up on the phone and berated him, or just did it in person!

Hmmm... You may be right.

It would be impossible for a nice guy like Gandhi or the Dalai Lama to get to be a president, not that they wanted to.

By the way, the current president and the Fed chairman just had a formal meeting. I did not bother to learn more about it until now. Here's what I found on the Web:

"President Biden met with Jerome H. Powell, the Federal Reserve chair, at the White House on Tuesday, as part of an effort to both sell Americans on a brightening view of the economy and reassure consumers that leaders in Washington are hard at work to slow rapidly rising prices.

White House officials cast the visit as a chance for Mr. Biden, who nominated Mr. Powell for a second term as Fed chair late last year, to congratulate him on his recent Senate confirmation. It was also the start of a monthlong attempt to convince the public that inflation is coming under control and that the economy is performing far better than Mr. Biden’s polling numbers would suggest.

Speaking to reporters at the start of the meeting, which also included Treasury Secretary Janet L. Yellen, a former Fed chair, Mr. Biden reiterated that fighting inflation was his top economic priority and that he would not interfere with the Fed as it tried to tame rising prices.

That fight, Mr. Biden said, “starts with a simple proposition: Respect the Fed, respect the Fed’s independence, which I have done and will continue to do.”...

 

[pb4uski]

It was $3.43 a dozen for large eggs last week for me. $4.99 for 18. Same store 12 weeks ago had a special for $0.77 (reg $1.49). $10 a dozen eggs seems crazy but frankly so did $3.50 a few months ago except organic free range ones.

Made me look... I paid $1.96 for a dozen large brown eggs the other day at Walmart... that was the cheapest they had available. I recall about 6 months ago when they were less than $1/dozen I was thinking that is cheap.

Milk is more of a factor for us as we go through about 2-3 gallons a week. I paid $3.67 a gallon the other day for 1% and that isn't bad at all.

 

[Magus]

I don't think the markets and financial pundits are really getting what The Fed is saying about how high they are planning to raise rates:

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

• Fed minutes released Wednesday indicated that officials are prepared to move ahead with multiple 50 basis points interest rate increases.

• In addition, the Federal Open Market Committee said policy may have to move past “neutral” and into “restrictive” territory.

While true, mortgages at 6.25% will be a 3% rise, which is more than the fed had over 2 years for their current FFR curve. And if the market destabilizes further, they will stop QT very quickly. The problem the fed has is the same my company faces and most in the US are doing. PPI has run well ahead of CPI for a long time here and price increases today are largely the result of imcreases in costs last year. Most of this year won’t be felt till later except gasoline. I think there is a reasonably good chance the fed has to stop QT by the end of the summer and reverse into QE by end of year, even while raising the short end till it gets to 3-4%

 

[copyright1997reloaded]

The Fed has announced they are going to stop buying mortgages and may sell bonds.

Just thought about another issue which will raise its ugly head soon.

The Fed had been buying "lots" of MBS (Mortgage Backed Securities) and ramped that up during Covid:
https://fred.stlouisfed.org/series/WSHOMCB

So, they may now have a lot of assets on their balance sheet that are under water? For example, I downloaded the recent April MBS purchases by the fed:
https://www.newyorkfed.org/medialibrary/media/markets/ambs/20220414-20220512.xls. Note the coupon rates on these, mostly in the 3-4% range. Given that MBS rates have moved up even more, most of the purchases over the last couple of years are likely under water?

Just pondering here, but this means:
A)The Fed, who had been sending $ to the treasury on profits from these operations in the past, will not be doing so. As I understand it, if the Fed books a loss, they (instead of getting $ from the treasury) mark it as a deferred asset and would be used to offset future profits before any additional $ are remitted to the US Treasury. Thus, the government deficit is impacted, but not as much as if the US Treasury would have to pay the Fed for losses.

B) Well dude (talking to myself), what happens if the Feds books end up with enormous losses? Can they default?
Answer: No, because they can always create reserves. (In other words, generate fiat out of thin air.) Note to self: That might not help on the inflation front.

 

[aja8888]

Just thought about another issue which will raise its ugly head soon.

The Fed had been buying "lots" of MBS (Mortgage Backed Securities) and ramped that up during Covid:
https://fred.stlouisfed.org/series/WSHOMCB

So, they may now have a lot of assets on their balance sheet that are under water? For example, I downloaded the recent April MBS purchases by the fed:
https://www.newyorkfed.org/medialibrary/media/markets/ambs/20220414-20220512.xls. Note the coupon rates on these, mostly in the 3-4% range. Given that MBS rates have moved up even more, most of the purchases over the last couple of years are likely under water?

Just pondering here, but this means:
A)The Fed, who had been sending $ to the treasury on profits from these operations in the past, will not be doing so. As I understand it, if the Fed books a loss, they (instead of getting $ from the treasury) mark it as a deferred asset and would be used to offset future profits before any additional $ are remitted to the US Treasury. Thus, the government deficit is impacted, but not as much as if the US Treasury would have to pay the Fed for losses.

B) Well dude (talking to myself), what happens if the Feds books end up with enormous losses? Can they default?
Answer: No, because they can always create reserves. (In other words, generate fiat out of thin air.) Note to self: That might not help on the inflation front.

The FED's plan with MBS holdings is to let them mature (loans paid off) and that's it. They MAY decide to sell them at some point in the future though.

 

[Running_Man]

I don't think the markets and financial pundits are really getting what The Fed is saying about how high they are planning to raise rates:

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

• Fed minutes released Wednesday indicated that officials are prepared to move ahead with multiple 50 basis points interest rate increases.

• In addition, the Federal Open Market Committee said policy may have to move past “neutral” and into “restrictive” territory.

As a point in the pressure on interest rates BEFORE any significant increase in FED policy, Junk bonds spread has surpassed the 2018 level where the FED had to stop their interest rate hiikes. IF they go forward with hikes and don't worry about the HY spread and the mortgage spread they will both get to an excess of inflation.

By logic FED will have to reverse course rapidly, this is far more dangerous than what I was looking at in September of 2018, this is far far worse, so since it only lasted 3 months last time and they are really just starting in June, I doubt this continues to September. But because of the latest inflation numbers they may have to let people see how bad it could be without additional QE, by which in a week they could buy a couple trillion in assets and put housing back at 3 percent if that's what they want.

Also the value of a $1,000 30 year mortgage bond issued at 3% is only worth 558 dollars at 6.25%. So it is probable that Fed losses are well over 500 billion on their MBS holdings alone. Not that they will ever recognize that. They are likely down about 10% on their tresury holdings to date, which they will sell. If those rates explode they'll have to stop that. Losses of over a trillion even for the FED is closing in on 5% of GDP and is quite significant, after all at the end of the day they are a bank, just with superpowers.

 

[Magus]

As a point in the pressure on interest rates BEFORE any significant increase in FED policy, Junk bonds spread has surpassed the 2018 level where the FED had to stop their interest rate hiikes. IF they go forward with hikes and don't worry about the HY spread and the mortgage spread they will both get to an excess of inflation.

By logic FED will have to reverse course rapidly, this is far more dangerous than what I was looking at in September of 2018, this is far far worse, so since it only lasted 3 months last time and they are really just starting in June, I doubt this continues to September. But because of the latest inflation numbers they may have to let people see how bad it could be without additional QE, by which in a week they could buy a couple trillion in assets and put housing back at 3 percent if that's what they want.

Yup, this is more or less what several investment banking firms told my company over the last week when we were in NYC. HY spreads are blowing out, especially the bottom half of HY. None of them think the FFR will go over 3.5% and all of them think they’ll start to pull back within 6 months of hitting that or earlier

 

[youbet]

Just returned to Chicago from northern Minnesota where we stayed in a rented cabin and chased walleyes around the lake for a week. Great fun. Caught lots of fish. Saw some friends and did some serious partying late evenings (serious for geezers that is).

This morning I looked at gasoline consumption for the 1,200 mile round trip and figured we paid close to $300, or about double compared to last year. Not enough to keep us home, but enough to start the resort owners up there thinking about cancellations possibly coming up in the future if gas prices keep rising and people re-prioritize.

We drove our 1999 F150, five speed manual, V8. Got about 20 mpg.

I described it to DW as being like sitting with the window open and tossing out a quarter about once a minute!

 

[Koolau]

Notice how Gas prices are sky high and rising but funny how there are no shortages. I am sure the oil companies and refineries are loving it.

No shortages indicates supply and price are in balance.

And yes, the oil companies are loving it - until it all goes south as it always does (think Houston in 1982, 2008, 2016, and who can forget $16 oil in April 2020? Then, they won't be loving it - but we will.

Oh, oil companies loving it sounds like a buy signal to me, but I don't buy individual (or even sector) stocks. YMMV

 

[aja8888]

No shortages indicates supply and price are in balance.

And yes, the oil companies are loving it - until it all goes south as it always does (think Houston in 1982, 2008, 2016, and who can forget $16 oil in April 2020? Then, they won't be loving it - but we will.

Oh, oil companies loving it sounds like a buy signal to me, but I don't buy individual (or even sector) stocks. YMMV

I am pretty sure on April 20, 2020 oil futures fell to -$37/bbl (May 2020 contract). Is that what you meant? The actual price per barrel was jumping around like crazy just before that drop.

 

[Koolau]

I just paid $3 dozen (extra large eggs) this afternoon.

We were paying $3/doz this time last year in Honolulu.

 

[Koolau]

I am pretty sure on April 20, 2020 oil futures fell to -$37/bbl (May 2020 contract). Is that what you meant? The actual price per barrel was jumping around like crazy just before that drop.

No expert, just looked at a chart of oil prices by date and that's what I saw on that date. It could be wrong. YMMV

 

[NW-Bound]

I am pretty sure on April 20, 2020 oil futures fell to -$37/bbl (May 2020 contract). Is that what you meant? The actual price per barrel was jumping around like crazy just before that drop.

No expert, just looked at a chart of oil prices by date and that's what I saw on that date. It could be wrong. YMMV

Yes, I do remember the price of oil futures going negative, but it lasted only a day or two.

What happened was that future holders were obligated to take delivery of crude that they had no place to store. Hence, they had to pay somebody to take ownership of that oil. I remember oil tankers were paid handsomely to be used as crude storage tanks.

It's the same as California having to pay Arizona to accept some solar electric power when there was a surplus and nobody to use it. CA utility could not cut off the home owners with solar power from the grid, so that the latter would not pump unwanted solar power into the grid.

When you suddenly have too much of something and are drowning in it, you have to pay for someone to unload it. The law of supply and demand rules supreme.

In January 2020, the world's governments began restricting travel and closing businesses to stem the coronavirus pandemic. Demand for oil fell. In the first quarter of 2020, oil consumption was 5.6% lower than it had been in the first quarter of 2019.

The supply glut was made even worse by a competition between Russia and OPEC. On March 6, Russia announced it would increase production in April. To maintain market share, OPEC announced it would also pump more oil. Prices fell even further. On April 12, 2020, OPEC and Russia agreed to lower output to support prices.

The situation was exacerbated about a week later when traders looking to roll-forward expiring futures contracts (and avoid taking physical delivery of oil) pushed the price of a barrel of oil down to -$40.32. However, this historic anomaly was short-lived. The price quickly moved back into positive territory and was trading around $40.00 by June.

 

[Koolau]

No matter the absolute prices, the point I was trying to make is that it's not always good to be an oil company. Sometimes you have pricing pressure - like now - and sometimes you don't. Like all commodities, you make your money when you can and then hang on when everything turns on you. When you're making money hand over fist, you will be accused of gauging and then when you're at $16 (or $37) nobody thinks about you.

Just like right now the airlines are able to raise prices and several years ago they were losing billions and consolidating. Next year or the year after, they'll be begging us to fly again. It's the nature of the beast.

 

[NW-Bound]

No matter the absolute prices, the point I was trying to make is that it's not always good to be an oil company. Sometimes you have pricing pressure - like now - and sometimes you don't. Like all commodities, you make your money when you can and then hang on when everything turns on you. When you're making money hand over fist, you will be accused of gauging and then when you're at $16 (or $37) nobody thinks about you.

Just like right now the airlines are able to raise prices and several years ago they were losing billions and consolidating. Next year or the year after, they'll be begging us to fly again. It's the nature of the beast.

Well, the same thing happens to stock holders.

Sometimes you make mucho money, other times like now you grit your teeth and bear the pain. Heh heh heh...

 

[Koolau]

Well, the same thing happens to stock holders.

Sometimes you make mucho money, other times like now you grit your teeth and bear the pain. Heh heh heh...

True, but no one accuses you of gauging when you're making a ton on Tesla or Microsoft (or even oil company stock) like they do when you ARE an oil company. Just sayin'.

 

[Teacher Terry]

I booked my tour to Ireland 8 months ago including airfare and it seemed expensive. It doesn’t feel that way anymore).

 

[11522914]

I am pretty sure on April 20, 2020 oil futures fell to -$37/bbl (May 2020 contract). Is that what you meant? The actual price per barrel was jumping around like crazy just before that drop.

Here are a couple of pictures I took on Yahoo Finance. I believe the dates were April 20 & 21, 2020. I remember this was history in the making.

 

[NW-Bound]

True, but no one accuses you of gauging when you're making a ton on Tesla or Microsoft (or even oil company stock) like they do when you ARE an oil company. Just sayin'.

I know. Life is not fair.


PS. In another thread we were talking about how eggs have gone from $1/dozen to $3/dozen and beyond. That's a huge percentage increase. Why has nobody proposed an investigation into this "gouging" practice?

 

[Montecfo]

As a point in the pressure on interest rates BEFORE any significant increase in FED policy, Junk bonds spread has surpassed the 2018 level where the FED had to stop their interest rate hiikes. IF they go forward with hikes and don't worry about the HY spread and the mortgage spread they will both get to an excess of inflation.

By logic FED will have to reverse course rapidly, this is far more dangerous than what I was looking at in September of 2018, this is far far worse, so since it only lasted 3 months last time and they are really just starting in June, I doubt this continues to September. But because of the latest inflation numbers they may have to let people see how bad it could be without additional QE, by which in a week they could buy a couple trillion in assets and put housing back at 3 percent if that's what they want.

Also the value of a $1,000 30 year mortgage bond issued at 3% is only worth 558 dollars at 6.25%. So it is probable that Fed losses are well over 500 billion on their MBS holdings alone. Not that they will ever recognize that. They are likely down about 10% on their tresury holdings to date, which they will sell. If those rates explode they'll have to stop that. Losses of over a trillion even for the FED is closing in on 5% of GDP and is quite significant, after all at the end of the day they are a bank, just with superpowers.

But they aren't "down" if they hold them to maturity, as advocates of buying individual bonds often say. No loss to record.

 

[Running_Man]

But they aren't "down" if they hold them to maturity, as advocates of buying individual bonds often say. No loss to record.

That is their argument. Was also the argument of Lehman brothers