What I See for 2022: Interest Rates, Mortgage Rates, Real Estate, Stocks & Other Assets as Central Banks Face Raging Inflation

An extra-special cocktail of three powerful ingredients with no cherry on top awaits us in 2022.

By Wolf Richter for WOLF STREET.

Super-inflated asset prices such as housing, stocks, and bonds; massive inflation; and central banks that have started to react.

Many central banks have started pushing up interest rates; others have ended asset purchases. And Quantitative Tightening (QT) – central banks shedding assets – is on the table.

Rising interest rates in the US won’t catch up with raging inflation in 2022 – CPI inflation is now 6.8%, the highest in 40 years.

But unlike 40 years ago, inflation is now on the way up. In the early 1980s, it was starting to head down. We need to compare the current situation to the 1970s, when inflation was spiraling higher. So we’re entering a new environment where the economy will be doing things we haven’t seen in many decades. It will be a new ballgame for just about everyone.

As is always the case, the year-over-year inflation figures will fluctuate. CPI could go over 7% or 8% and then fall back to 5% only to jump again, providing moments of false hopes – as they did during the waves of inflation in the 1970s – only to race even higher.

Inflation has now spread deep into the economy, with services inflation picking up, and there are no supply-chain bottle necks involved. This includes the inflation measures for housing costs. Those housing inflation measures have begun to surge.

We know that the figures for housing inflation, which account for about one-third of total CPI, will surge further in 2022, based on housing data that we saw in 2021, and that is now slowly getting picked up by the inflation indices. They started heading higher in mid-2021 from very low levels, and they’re going to be red-hot in 2022.

This is inflation is fueled by enormous monetary and fiscal stimulus, globally, but particularly in the US – with nearly $5 trillion in money-printing since March 2020, and over $5 trillion in government spending of borrowed money.

The stimulus has broken price resistance among businesses and consumers. Enough businesses and consumers are willing to pay even the craziest prices – a sign that the inflationary mindset has taken over for the first time in decades. All this stimulus has broken the dam.

Inflation is not going away until central banks remove the fuel via QT to allow long-term interest rates to rise, and by pushing up short-term interest rates via rate hikes, and until these policy actions are drastic enough to shut down the inflationary mindset and reestablish price resistance among businesses and consumers.

Central banks around the world react.

The Bank of Japan ended QE in May 2021 – the longest-running money-printer has stopped printing money.

The Fed started tapering QE in November and doubled the speed of the taper in December. If it doesn’t accelerate it further, QE will end in March.

The Bank of Canada ended QE in October. The Bank of England ended QE in December. The ECB announced that it would cut its huge QE program in half by March. Several smaller central banks that did QE have ended it.

Central banks in developed markets already hiked rates:

  • The Bank of England: by 15 basis points, in December, for liftoff.
  • The National Bank of Poland: three hikes, totaling 165 basis points, to 1.75%.
  • The Czech National Bank: five times by a total of 350 basis points, to 3.75%.
  • Norway’s Norges Bank: for the second time, by a total of 50 basis points, to 0.5%.
  • The National Bank of Hungary: many small hikes totaling 180 basis points, to 2.4%.
  • The Bank of Korea: twice, by 50 basis points total, to 1.0%.
  • The Reserve Bank of New Zealand: twice, by 50 basis points total, to 0.75%.
  • The Central Bank of Iceland: four times, by 125 basis points in total, to 2.0%.

Central banks in developing markets have been much more aggressive in hiking rates to get inflation under control and protect their currencies; a plunge in their currencies would make dollar-funding very difficult. They’re trying to stay well ahead of the Fed. Among them:

  • The Central Bank of Russia: seven times, totaling 425 basis points, to 8.5%.
  • The Bank of Brazil: multiple huge rate hikes, by 725 basis points since March, to 9.25%.
  • The Bank of the Republic (Colombia): three hikes totaling 125 basis points, to 3.0%.
  • The Bank of Mexico: five hikes, totaling 150 basis points, to 5.5%.
  • The Central Bank of Chile: four hikes, 350 basis points in total, to 4.0%.
  • The State Bank of Pakistan: three hikes, totaling 275 basis points, to 9.75%.
  • The Central Bank of Armenia: seven hikes, totaling 350 basis points, to 7.75%.
  • The Central Reserve Bank of Peru: five hikes, totaling 225 basis points, to 2.5%.

There are some exceptions, particularly Turkey, which has embarked on an all-out effort to destroy its currency via inflation and is succeeding in doing so by cutting rates. Over the year 2021, the lira has collapsed by nearly 80% against the dollar, with inflation raging at over 20%.

But in the US in my lifetime, there has never been a toxic combination of interest-rate repression to near-0%, amid 6.8% inflation, as the Fed’s money-printing continues for now.

In 2022, the Fed begins to unwind this phenomenon far faster than expected months ago.

Long-term interest rates cannot move much higher until the Fed ends its QE program, which was designed to repress interest rates. The end of QE is scheduled for March.

Beyond that, long-term interest rates cannot seriously rise until the Fed’s balance sheet declines. This happens when the Fed allows maturing securities to roll off without replacement. At the last meeting, Powell informed markets that the Fed is now discussing QT.

At every Fed meeting, the process has sped up. Over the past few meetings, the Fed suggestions went from no rate hikes in 2022, to three hikes in December. It went from not even discussing the end of QE to accelerating the end of QE. And it went from QT being unthinkable in 2022, to it already being discussed in December 2021. The Fed is preparing the markets for these shifts.

And this trend of speeding up the process is likely to continue in 2022.

Last time, the whole procedure took four years: From the start of tapering QE in early 2014 to significant QT and multiple rate hikes in 2018.

This time around, the whole process from beginning of tapering (November 2021) to significant QT and multiple rate hikes may take a year.

Significant QT will allow long-term rates to move higher, thus keeping the yield curve steep enough when the Fed raises short-term rates.

The reason why the Fed will move faster in 2022 is this raging inflation. Back in 2014 through 2016, the price of oil collapsed from over $100 a barrel for WTI to below $30 a barrel, which pushed down inflation, and there were no inflationary pressures. The Fed just wanted to normalize its monetary policy. Now inflation is raging, and the Fed needs to tighten. By a lot. And some of this will start in 2022.

What will higher interest rates mean for the real estate.

Normally, in the initial phases of rising mortgage rates, there is a mini-surge in buying as homebuyers want to lock in the lower mortgage rates before they rise further. But when mortgage rates reach the certain magic level, home sales begin to fizzle, as buyers can no longer afford the payments at the higher mortgage rates and at those sky-high prices. Something has to give for sales to take place: price cuts.

This situation was starting to play out in 2018, particularly later in the year, as the 30-year fixed-rate mortgage rates approached 5%. Somewhere over 4% was that magic rate in 2018 where the market started to tilt. At that time, stocks also sold off sharply.

But in 2018, there wasn’t much inflation, and the Fed could justify backing off. Now, in 2022, there’s raging inflation. And bonds puked.

This time around, it’s very different: home prices have skyrocketed – up nearly 20% year-over-year for the US overall, according to the Case Shiller Index, and by 30% year-over-year in some markets.

So the classic behavior of buyers jumping into the market when they see rising mortgage rates on the horizon may not happen to the extent it happened in the past.

When mortgage rates reach that magic level, which might be lower than last time given today’s sky-high prices, volume will fizzle. For more sales to occur, prices have to come down. This starts the cycle.

Lower mortgage rates lead to home price inflation. Higher mortgage rates do the opposite – they will eventually cool the housing market. Housing market downturns proceed slowly and can take many years. So in 2022, we might see the first timid beginnings in select markets.

Other property markets are implicated too. For example, back in the early 1980s, when interest rates were jacked up to crack down on inflation, the farmland bubble burst, and farmland values plunged by over 50% in some regions of the Midwest from 1981 through 1985. Overvalued farmland had been used as collateral for loans issued by specialized banks, and when those loans went bad, some those banks collapsed.

Then in 2004, the Fed started raising interest rates, eventually raising from 1% to over 5% by mid-2006. And that’s when the Housing Bubble turned into the Housing Bust, housing prices spiraling down, and lower collateral values then triggered the mortgage crisis, and the bank collapses and the whole schmear.

It’s not always clear in advance what exactly will keel over when long-term interest rates rise far enough in an overleveraged market. But one thing is clear: Some things keel over.

Last time we had this inflation was 40 to 50 years ago, but back then interest rates were already much higher.

In 1973, when inflation began to surge, mortgage rates were moving north of 8%. By 1979, they exceeded 10%. By the early 1980s, 30-year fixed-rate mortgage rates were over 15%.

But we cannot really compare the situation in 2022 and beyond with that of 50 years ago because for much of the time since 2008, we’ve had massively repressed interest rates, massively inflated real-estate prices, and massively inflated asset prices across the board. Financial repression reigns, with “real” short-term interest rates all the way up to junk bonds being negative. That just hasn’t happened before in my lifetime.

In terms of the housing market, there are unsavory parallels with 2005: Investors are heavily into it; and there are lots of low-down-payment loans, guaranteed by the FHA and other government agencies, with down-payments as low as 3%. Those agencies have also guaranteed many mortgages issued to subprime borrowers.

But this time, the taxpayer is mostly on the hook for those mortgages, not the banks, when the market turns south. So a financial crises of the type in 2008 is not what I see because the banks have sloughed off much of the risk to the taxpayer.

What I see is just the beginning of a down-turn in asset prices, including housing – but not a collapse of the banking system.

The Fed, now that it has this gargantuan balance sheet, has a huge tool in the toolbox that it didn’t have 40 years ago: Trillions of dollars’ worth of bonds that it can let roll off or sell outright to drive up long-term rates without even having to raise short-term rates all that much. It’s long-term rates that matter the most, and QT is designed to push them up, just like QE was designed to push them down.

And much like QE inflated the markets since 2008, with only a mild boost for the real economy, when QT slaps the markets and asset prices, it will only have a relatively mild impact on the real economy. And that economy is so overstimulated that letting out some of the hot air would be a good thing – and that’s likely what the Fed is gunning for. If it’s big enough, and lasts long enough, it might even tamp down on inflation in future years.

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  258 comments for “What I See for 2022: Interest Rates, Mortgage Rates, Real Estate, Stocks & Other Assets as Central Banks Face Raging Inflation

  1. p coyle says:

    meh. everything will work out fine. “experts” are in charge, after all.

    • Old school says:

      Mississippi stock bubble was created by first modern central banker and helped over indebted France live a fantasy for a few years. It is where the word millionaire comes from.

      Stock went from 500 to 10,000 back to 500 in a short period wiping out a lot of bag holders and screwing up the economy further. Also caused money supply to double and 20% inflation, before the collapse. Sounds familiar.

      • Nbay says:

        Interesting read. Thanks, OS. And like a modern “Corporateur” John Law lived it up to the end of his days, maybe even left some dynastic wealth. Quite a manipulator of people, and good quick witted BSer, I would assume.

        • Educated but Poor Millennial says:

          Wolf,
          “This starts the cycle.“
          I have been waiting so long, what if it wont happen? ( again)

    • kitten lopez says:

      (yay! p coyle my friend you were right – you DID get the jump on being the first commenter here. that’s some kinda luck for the New Year!)

      happy new years, y’all.

      my teeth are getting sharper… drum roll for future feats of …i don’t know what. but SOMETHING..

      x

    • kitten lopez says:

      p.s. little hint:

      I’M YOUR MXTHERFXCKIN’ CHERRY ON TOP OF ALL THIS.

      (maniacal giggle)

      x

    • Cashboy says:

      We know what an expert is.
      An “Ex” is a has been and a “Spurt” is a drip under pressure.

  2. Shiloh1 says:

    No double-digit % interest money market funds to hide out in unlike mid 70s to early 80s.

    • Beardawg says:

      Shiloh1

      I am not 100% sure, but it sounds like Wolf predicts “expected” Fed action (rolling off treasuries) to make long term Treasury Bonds (30 year) the place to hide out for the next several years – maybe even a decade?

    • andy says:

      I’m planning to hide out in hard cash. Just waiting for $1000 bill to come out.

  3. 8_mile_road says:

    //But this time, the taxpayer is mostly on the hook for those mortgages, not the banks, when the market turns south. So a financial crises of the type in 2008 is not what I see because the banks have sloughed off much of the risk to the taxpayer.
    What I see is just the beginning of a down-turn in asset prices, including housing – but not a collapse of the banking system.//

    In 2008, many banks got bailed out. Now the ticked-time bomb is on investors, where no one will bail them out. Wolf, in your opinion, what would be the trigger point for a housing price collapse?

    • Eastern Bunny says:

      There won’t be any house price collapse.
      Wolf has been consistently wrong on that.
      Fed can’t stop the money printing now and we have no political leadership to handle the crisis that higher interest rates will bring about.
      We are heading into some societal collapse through high inflation or debt deflation no matter what the Fed does. Hang on to your house, you will need it.

      • Heff says:

        I think the RE downturn will be local and selective. People are leaving states like Illinois, California and New York now for more conservative areas and less taxes. Wait until more liberal states start with this “covid passport” nonsense and other restrictions on peoples’ movement. I believe you’ll see rural, red state RE continue to accelerate no matter the price.

        • QQQBall says:

          Right and its already happening. Think in terms of geo-arbitrage. You sell a crap shack in LA for $1.2MM and buy a beautiful home on golf course or with acreage for $350,000 (or whatever) in another area.

          Our numbers are a little different, and we are not in LA, but its a no-brainer, except for the weather, even on an after-tax basis. You move up in quality, down in price, lower your cost of living and the bullshit factor goes way down.

          Most of my buddies have already done this and some still run businesses in California and some just kept their residence here for PT occupancy and moved their adult kids into it.

          Wolf, you article should consider the differential b/w rents and mortgage payments.

        • Jake W says:

          qqqball, the issue with that is that it assumes permanent work from home every day. from what i’ve seen, it looks like a hybrid will be the standard. if that’s the case, the jobs have to move to those low cost of living areas too.

        • Depth Charge says:

          Jake W, stop making sense, you’re going to harsh their fantasies.

        • Pete says:

          And Heff, they’re all coming to Raleigh, NC. It’s ground zero here. Never seen anything like it. Except for supply chain issues the real estate market here is raging! The South is on the rise!

      • roddy6667 says:

        That’s what I was saying in 1987. Real estate was my religion. I remember the office meeting in February 1988, where my broker showed us how home prices were starting to drop in the Greenwich area, where the boom had started. Also, Days On Market (DOM) was 18 then. Only took 18 days for the average listing to go under deposit in January 1988. The number started to rise. This trend did not change until home prices in many towns had dropped 50%. I took a decade, TEN YEARS, until home prices reached their 1988 level again. This was not Appalachia or Mississippi. It was Connecticut.
        Never say never.

        • roddy6667 says:

          They say the public has a 10 year memory. I think a ferret on crack has a better memory.

        • rankinfile says:

          Governor Weiker killed the golden goose with an income tax in Connecticut.The time-frame lines up perfectly.

        • COWG says:

          “ I think a ferret on crack has a better memory”

          And from a lot of behavior I’ve seen lately, a better personality…

        • perpetual perp says:

          Unwinding leverage has traditionally slowed down real estate bubbles. It took 10 years to unwind the RE commercial (S&L sparked) bust of the early 1990s. The national financial plumbing, in order to work relatively well, works best when liquidity is good, interest rates are reasonable, and the tax code is fair. I’d start with the last problem first.

      • historicus says:

        I tend to agree….as long as the 30yr mortgage is below inflation, well below, spec money will flow to real estate.
        However, this trade is very heavy and there is plenty of pyramiding…..
        remember in 2008 how that practice was reviled? Now subsidized.
        Remarkable.
        History repeats itself, and each time the cost goes UP.

      • Old school says:

        If you bought the SP500 or a house a decade ago you got a good deal and don’t need to sell if you don’t want to. Buying anything now is obviously not buying near the bottom. It’s too late to buy in my opinion.

        • Pete says:

          The top is in. That’s what people thought up in NYC back in 2007. Then the market crashed and again ten years later, before COVID, housing prices still were up well past previous overpriced highs. Sure, the FED is removing the punch bowl finally but real estate markets are local phenomena and just because California and New York are committing suicide doesn’t mean that all markets will get splattered with their blood. Everyone is moving to Raleigh because RTP is becoming the new Silicon Valley.

      • Depth Charge says:

        “There won’t be any house price collapse.”

        I remember such bold proclamations last time, too. In fact, they went something like this:

        “There will be no house price collapse.”
        “Prices might dip slightly, but then they’ll go even higher.”
        “OK, prices are down in some areas, but not in places where people actually want to live.”
        “Not in my state.”
        “Not in my town.”
        “Not in my neighborhood.”
        “Not on my street.”
        “Not my house.”

        And then you never heard from these people again, because they disappeared. They were full of shit the whole time. Wishful thinking is magical thinking.

        • David Hall says:

          There was a foreclosure crisis in 1933 and one in 2010. It is not like they have been a frequent occurrence.

          It seems every year there are predictions of imminent stock market crashes. Lo and behold when a crash comes someone will take credit for predicting it.

          In 2020 Warren Buffet predicted the stock market would go down 50%. A few days later the market started going up. It is difficult to time the market.

        • Pea Sea says:

          Who said anything about a foreclosure crisis? A real estate crash means the price of real estate goes down substantially. This usually results in some foreclosures but doesn’t have to result in a “foreclosure crisis.”

        • billytrip says:

          Exactly. I am in my 60s. I have seen this play out time and again. The reasons can change but the reality never does.

          Housing seems to be on a permanent boom-bust cycle. The idea that house price “cannot go down” is pretty suspect at best. When housing prices outstrip earning power, they cannot remain at their elevated levels. Houses are an “emotional” investment, hence the booms are exaggerated (“we’ll be priced out forever if we don’t move”) and the busts are also (when the market goes soft it usually does so with a vengeance).

          Along similar lines, people say “the Fed can’t raise rates”. Well, the Fed says what it is going to do and then it does it. It has said they are going to raise rates and they will. How much is an open question but the idea they “can’t raise rates” is daft.

        • Jason K says:

          @David Hall

          It’s not about “timing the market”. Stock prices have little to no correlation to earnings or cash flows anymore. See Bitcoin for an even bigger laugh.

          It’s all about “timing the Fed”. If investors had known 20 years ago exactly what the Fed would be up to, striking it rich would be simple.

          It’s almost become the sole, determining factor in terms of which investors get crushed and which ones thrive. Did you accurately bet on the “Fed”. Did you choose to ignore it’s lies when it pretended to be on the path to tightening credit in 2018, for example.

          Unfortunately, guessing what the Fed will do is also a bit of an inside game.

      • Augustus Frost says:

        History never repeats exactly, so I don’t think there will be a 2008 style housing bust next time either. But this only applies to the first downturn, as this asset mania is the biggest ever and the “correction” should include multiple bear markets of substantial size lasting several decades.

        Interest rates are going to go up noticeably, no matter what the FRB does or doesn’t do. It just takes longer than most expect. If March 2020 was the end of the bond bull market from 1981, it’s been two years and the movement isn’t even noticeable.

        I also still expect the government to impose another mortgage moratorium when millions of borrowers can’t pay again. They own most of the paper, it’s probably cheaper than an alternate bailout, and it will definitely be more popular politically.

        Noticeably higher interest rates at anywhere near current prices still means new buyers won’t be able to buy, unless credit terms are loosened even more (very loose now) or they have substantial equity.

        If anything like this happens, I expect sales volume to tank once those with enough equity sell.

        • Jay says:

          Wolf, “But we cannot really compare the situation in 2022 and beyond with that of 50 years ago because for much of the time since 2008, we’ve had massively repressed interest rates, massively inflated real-estate prices, and massively inflated asset prices across the board.”

          Given how much RE has appreciated since 2018, when interest rates last approached 5%, the new magic rate is probably around 4-4.25%. This means that the RE market will start to cool in the later half of 2022 and then see a 5-10% drop play out over the next 12-18 months. What happens after that is entirely up to the FED and how high they let interest rates climb and how quickly inflations cools off towards a manageable 4% or less.

          I agree with your point about moratoriums. The government owns something like 60% of all mortgages which is crazy. It’s like Uncle Sam is taking over the mortgage business.

        • ru82 says:

          @August and Jay

          Agree with both of you.

          2008 you had a bunch of subprime borrows who could not pay when teaser rates rose. The was also a surplus of over 5 million homes built. There were enough condo permits (50k) issued in Miami that would have supply 50 years of population growth.

          This time there is low inventory, most homebuyers have a lot of equity to weather a 20% downturn, good credit, and I still know a lot of people with good jobs and good credit who still keep getting outbid on houses.

          I am not making any predictions but with the government owning so much of the paper….housing moratoriums is an easy thing to implement by the Government if needed to prevent a 2008 crash when nobody knew who held what crappy subprime paper.

        • Jake W says:

          ru82, where is your evidence that “most” homebuyers have enough equity to weather a downturn? i’ve seen a lot of people buying with 5-10% down again. and what makes you think a 20% drop is all we’ll see? in many places, we saw 40-50% last time.

          last, at the risk of repeating myself, there is only “low” inventory because people are buying them as investments. there is not low inventory relative to the population as it was a few years ago.

          people are getting outbid by investors who think prices only go up. are they going to keep those houses when not only the purchased at the peak, but they can’t rent them out for anything close to their carrying costs?

        • Wolf Richter says:

          Jake W,

          ru82 is talking about people who bought a few years ago or further in the past, which is “most” homeowners. About 1/3 of homeowners own their homes free and clear, with 100% equity. Many others have made payments for years and are halfway through their mortgages, and they have lots of equity.

          A downturn will wipe out the equity of more recent buyers first. Other homeowners will still have equity, but less.

          The mortgage crisis was caused by 10% of the homeowners.

      • gametv says:

        There are some people that still believe mortgage rates will stay in the 3% range, they are just wrong. 4% s coming very soon. Just wait for the Treasury to try to sell hundreds of millions in debt, after basically starving the market for 10 months. It might take a few auctions, but there is going to be a holy shit day where the auctions have no buyers. Rates will scream higher.

        Every realtor and real estate investor will say that prices always go up, and they have, but there comes a turning point in every market and if mortgage rates rise from 3% to 5% this year, or even higher, those real estate prices will drop and there will be a ton of sellers and alot fewer buyers. Recent buyers are all thinking that inflation means higher real estate prices, which is just wrong, because it leads to higher mortgage rates.

        • Jay says:

          Like Wolf says, there’s $1.9T sloshing around in those 24 entities that do reverse repos, so that’s a lot of $2.52T in MBS the FED owns. As such, it could take at least two years for the FED to run a significant portion off its balance sheet before you get to that holy crap moment. But, I agree. It’s coming. The question is when.

        • Swamp Creature says:

          gametv

          I never listen to Real Estate agents for investment advice. Especially now. They are not the solution to your investment problems in today’s chaotic market. THEY ARE THE PROBLEM!
          They are the ringleaders of the inflation lobby always saying the same bull s$it over and over again.

      • Jason K says:

        A “societal collapse” would, by definition, crash the housing market (and government, and a lot of other things as well). So I’m not sure what your point is.

        I agree though that the FED would rather saw off its own foot than raise interest rates and reverse money printing.

        IT will not be their choice however.

  4. MyLadyHumps says:

    “It’s tough to make predictions, especially about the future.” – Yogi Berra

    I have my own predictions to counter your suggestion of a tightening monetary policy followed by a correction in Real Estate, stocks and bonds:

    The Fed will simply find an excuse to continue the tsunami flood tide of money, and every asset from manure (crypto?) to houses in Flint Michigan will continue to inflate.

    To support my prediction:

    Exhibit A – The government now relies on Fed money printing to fund it’s bloated spending.

    Exhibit B – The Fed say they will tighten monetary policy and history shows the Fed is led by compulsive liars, the truth is the opposite of anything they say.

    The prosecution rests.

    • But do you agree with the idea that if inflation remains stubbornly high, the Fed will be forced to tighten? Or are you saying that inflation is transitory, so there’s nothing to worry about?

      • p coyle says:

        whatever happens, will happen. i’m going to out on a limb here, and say expect the unexpected,

        • masked ghost says:

          Old Geezer here. I agree with P. Coyle. Expect the unexpected to happen.

          FYI there was plenty of inflation in the 1960’s as well. But the middle aged and geezers then, had had 10+ years of experience with the Great Depression. They stuck their money in the bank at low interest rates.

          Almost everything consumed in America at this time was also “made in America”.

          But now it is different. Expect the unexpected.

      • MyLadyHumps says:

        The Fed put themselves in a situation that requires them to fund the government.

        The Fed told politicians to run enormous deficits and take advantage of low interest rates, seems obvious that such advice comes with an implicit guarantee that interest rates will remain low forever, no matter the situation, and that is what is going to happen.

        Inflation is going to run out of control and the Fed will do nothing to stop it. Their wealth is invested in assets, they don’t give a rat’s ass about inflation.

        The dollar is doomed. The only thing surprising about this fact is some people still don’t understand or believe it.

        • historicus says:

          Indeed.
          Any comparison with the 70s and today must begin with this point.

          In the 70s we had a Fed that FOUGHT inflation.
          Today, we have a Fed that PROMOTES inflation….and the inflation we see now is by their own hand.

          The bottlenecks are a result of inflationary awareness demand (IAD)…..”get me all you can at that price.” The Fed would have you think it is the cause. Nope.
          In 1979 the national debt was less than a Trillion. It was an era in which people lived under the assumption each generation must pay its own way. (now 30 Trillion)
          Enter the MMT attitude of 2009. QE, Trillions in digital printing, mortgage rates suppressed, and still suppressed to half of what would be normal.
          The Fed is openly shirking their duties, answering to another voice…….the Fed has been hijacked. IMO. If they were, it wouldnt look any different than it does today.
          The proof will be the feet dragging response coming to the crazy inflation which is also coming. 1/4 pt raises? Are you kidding? No effect.
          The financial network talking heads all bullish as if they got the “nod”. They may well have.

        • historicus says:

          “The Fed put themselves in a situation that requires them to fund the government.”

          Who empowers the Fed?
          Who is the largest borrower on the planet?
          same answer

      • roddy6667 says:

        Everything is transitory.

      • Cookdoggie says:

        “But do you agree with the idea that if inflation remains stubbornly high, the Fed will be forced to tighten? Or are you saying that inflation is transitory, so there’s nothing to worry about?“

        The answer on what happens to inflation depends on whether wages spiral up as well. If they do, yes inflation will stick around but the current Fed still won’t address it. If not people will run out of money and prices will stop rising (they will not come back down). Note that “wages” these days includes all govt assistance, so I think you have the answer. The direction of society now appears to be to try and protect everyone from everything, with no accountability for poor decisions.

    • historicus says:

      The argument that the Fed cant raise rates because there is too much debt to service….
      reminds me of the student loans…
      I borrowed so much, how do you expect me to pay it back.
      Similar attitudes.
      X can’t happen because I did Y to an irrational degree.

      • Jake W says:

        it’s like the cigarette companies telling regulators they can’t reduce the nicotine content, because their current users are too addicted to it!

      • Peanut Gallery says:

        I also agree that the concept that interest rates “can’t” be raised is a bolonie.

        Politicians (and the public) would need to exercise severe austerity if interest rates hiked 3-4x. They could still issue debt, but just not nearly as much. The existing debt would still service at the ultra low rates that they were issued at.

    • The Real Tony says:

      For a start every monthly jobs or unemployment report will show there’s no jobs created and the unemployment rate is increasing. Then they’ll redefine the inflation rate again.

    • georgist says:

      The likes of Kissinger and his protegees won’t just give up hegemony like this. The American establishment must have strong resolve, even if their population are weak willed. I think they will try to right the ship, at some point.

      • Augustus Frost says:

        I agree with this sentiment, and it means crashing asset markets.

        The markets will be sacrificed in an attempt to preserve the empire.

        • georgist says:

          Exactly, if you don’t have an empire then what’s the point in the assets?

          Also these guys don’t want to be able to buy as much Gucci as they can imagine. They want to be at the big boy table, with the UK PM buttering them up. Power.

        • Corto Maltese says:

          This is the theme I can’t grasp fully. How I see things, elites can’t crash assets as that would be THE cause of a fall of their empire. Due to that there can’t be real tackling of inflation. Crashing assets means making US economy smaller then chinese. That also means halting of a war machine… Chinese economy would shrink together with US economy, but as it is an economy of production and export it should come up quickly relative to US and would result in China’s hegemony and loss of power for the US elites. Can anyone smarter give me a clue on wrong logic here.

        • Jake W says:

          corto, the u.s. empire and hegemony isn’t based on the inflated value of assets, but the value of our resources and our military. even if apple is only worth 1 trillion, instead of 3 trillion, we still have millions of square miles of land, with a lot of energy, natural resources, and arable farmland.

        • Mr. House says:

          The markets are the empire, and markets haven’t existed for some time because TPTB will not allow price discovery. It would show the emperor has no clothes.

        • Corto Maltese says:

          @Jake W

          I understand that USA is huge and rich in natural resources, so is Russia and the size of the economies is completely disproportional. I know there are differences in efficiency/productivity etc. but still… The way it looks to me is that huge part of US economy is based on consumer spending/debt and is held afloat by asset values. Removing asset values bubble would reduce economy to a shadow of it former self. To employ all the resources in USA in attempt to stay the biggest economy in the World without asset bubble would mean 180 deg change in today’s average american lifestyle. Different work/differnet dreams/different habits. I just can not see this happening. My view is that elites will push it until the very end, hoping Russia and China will flop before the $ is debased and loses Res. Curr. status and empire goes down the drain.

      • MarkinSF says:

        Not sure there is much they can do about it.
        Modern day “hegemony” equates (in addition to owning the reserve currency & the SWIFT operation) to controlling the Euro Asia landmass. Which it has by installing and maintaining military bases throughout Europe and the South China Seas as well as a plethora of soft power cultural shaping idioms.
        But China is laying claim to the South China Seas & Europe is turning East for LNG and trade. The “culture shock” of having someone like Trump actually becoming POTUS has awakened our allies to the “white trash with cash” nature of the US populace.
        Sanctions are losing their teeth as Russia-China-India-Iran are implementing workarounds to the SWIFT system and soon there may be real chaos in the US power centers.
        And chaos on the streets of America if this thing goes down. I hope you are right. That there is actually a way out of this but too much power has been entrusted to our glorious billionaires.
        Maybe they were right when they said America isn’t a country; it’s a business.

        • Corto Maltese says:

          This is also my view on things.. And as per my understanding crashing assets would just speed up loss of US hegemony… So I can’t see FED really tackling inflation and bursting assets bubble.

      • ej says:

        here here love.it

  5. The Bob who cried Wolf says:

    It’s an election year. The Fed will probably make a few threats and a raise here or there but not much can happen until after November. Outside forces may make something happen (like sept of 2008), but internal forces seem too afraid to stop this inflation train wreck we all see about to happen.
    Happy New Year

    • historicus says:

      Powell’s final confirmation is weeks away.
      There is an outside chance we get a “new” Powell after that event.
      But, I doubt it.

      • Peanut Gallery says:

        What is the specific date of confirmation? I couldn’t find it by searching on Google

        • historicus says:

          As far as I know, no date set.
          But Powell’s term is up in February….thus you could expect a january confirmation. Weeks not months away.

        • Peanut Gallery says:

          Historucs, thanks.

          I am very curious what Powell will do once confirmed. He would basically have free reign in his last term without any fear of politics, right? Or… not?

        • Powell is being boxed in by other nominations, Brainerd is vice chair, and the OCC, the comptroller, also oversees banking regulations. We haven’t heard the last of the insider trading charges either. The new voting members on committee are considered more “hawkish”. I think you will hear that word, “committee” more often at Fed meetings, Powell’s method of putting some distance between himself and the decision.

    • Danlxyz says:

      I agree. He has to make sure his job is secure before doing anything to rock the boat. After that he has more leeway to act.

      • Alex says:

        Powell’s fortune is in the stock market… Why would he let it evaporate? He can just keep saying “I understand the impact inflation may have on some most vulnerable, be assured that we have all the necessary tools to take on inflation if it gets out of control …”

        • Auld Kodjer says:

          It is not an illiquid fortune.
          Sell at the top.
          Reset the market.
          Buy at the bottom.
          Double his fortune.
          A market correction is not a threat to the insiders. It is an opportunity.

    • Jake W says:

      you are starting from the assumption that a drop in the stock market would be politically more painful for democrats than raging inflation that the government, whether that’s the white house, congress, or fed, is seemingly doing nothing about.

  6. Eastern Bunny says:

    Let me make a prediction here, by August this year, Fed will be doing some combination of QE and repo gimmicks in the double digit trillions. I don’t know what will trigger it, but it will be one in a century event , the kind we are used now to get every decade.
    You can’t taper a Ponzi scheme.

  7. Dale Havill says:

    It may be due to reading too many negative descriptions of macroeconomic history, but it seems like there is a bigger cycle occurring, more dangerous things involved than the Fed (and other central banks) making monetary adjustments to inflation.

    I started reading Dalio’s latest book (Principles for Dealing with the Changing World Order). The first chapter indicates that the book aims to spec out in more detail the determinants of his theory of universal long-term macroeconomic debt cycles — cycles of basic human socioeconomic behavior that are always the root cause of the rise and fall of world dominating financial powers.

    Of course, not having the 7.5 billion of investable assets required to get into his hedge fund, I have an uneasy suspicion that his motivation for laying his theory out is somewhat directed toward people a bit more well-financed than I.

    However, there may be something valid about Dalio’s descriptions of big decade long cycles where one dominating world economic/military power rises and then falls, resulting in a dangerous and potentially very violent change of world order. Many of Dalio’s determinants of a declining world power indicate the United States’ global financial and military dominance is definitely in trouble:

    1. General educational level declining.
    2. Real human productivity stops increasing.
    3. Trade deficits go south, imports paid for by debt.
    4. People borrow to maintain lifestyle to which they are accustomed.
    5. Innovation, technology, competitiveness rise in a challenging nation.
    6. Financial center dominance and reserve Fx status weakens.

    And Dalio’s new description includes internal sociocultural changes of the declining world power that seem to be happening to U.S. culture:
    1. Country has to choose between debt defaults and printing new money (devaluing currency and raising inflation).
    2. Ballooning wealth gap, causing conflict between rich and poor, political extremism, which undermines productivity as well as causing capital flight of the rich asset holders.

    Wolf describes how most people can’t really understand how bad inflation can get, because it happened 50 years ago. Similarly, Dalio asserts that most people can’t imagine what is the inevitable result of a likely change world order: “a painful period of fighting and restructuring that leads to great conflicts and changes…” It just doesn’t seem like it would happen for real. Sort of like watching a movie about a terrible pandemic virus pre-2020.

    • Enlightened Libertarian says:

      The vast majority of people look into the future and see the past.
      Thinking outside the box is not something the conventional “experts” are good at. That’s why we keep hearing them say “Wow, we sure didn’t see that coming.”

      • Truckman says:

        You will always hear the currently employed experts saying that. They would not remain employed if they said “It’s coming”. The politicians need experts to agree with whatever they do, as an insurance excuse if it all goes wrong. Right back in early January 2020, I said that the politicians would do nothing about the spread of Covid until it was too late, then claim there was nothing that could have been done, and that this was based on the advice of the experts (their experts of course, not THE experts).

        • Jake W says:

          the only thing the government could have done to stop the spread of covid into the u.s. would have been to entirely lock down the borders, meaning no one goes in, and no one goes out.

          targeting certain countries was always doomed to fail as a strategy, unless you could be certain that no one from one of the “banned” countries was traveling to a non-banned one.

          we certainly could have had better testing and ppe availability had the government prepared properly, but the idea that we could have stopped covid in its entirety is unrealistic.

    • Petunia says:

      People forget that usury was capped at 12% in the 1970’s. Inflation was bad, but most people were protected by the usury law. Credit cards and mortgages had the 12% cap, about the same as the worst inflation. What people felt were the lower wages, but because low wage jobs were plentiful, you could get a second and third job to make ends meet.

      Now interest rates are not capped, and there are not enough jobs to make up the losses in wages. This is different because then the govt made an attempt at protecting the people on Social Security with big increases and extra checks. Now they manipulate everything against the working class.

      I expect a massive jolt to the system is coming and it won’t favor the masses, just the few. I think the few already know too.

      • Augustus Frost says:

        The majority of Americans are destined to become poorer or a lot poorer.

        According to FRED, median household income and wealth have basically flatlined since 1998 and 1999 and this is during the biggest asset mania and spending binge ever.

      • COWG says:

        Also, before Reagan and Stockmans tax bill,
        Credit card interest was tax deductible and you didn’t pay income tax on Social Security…

    • Augustus Frost says:

      The US will probably lose its leading world power status by 2050, at the latest and probably sooner.

      One report I read estimated China’s military capability at an estimated 57% of the US now but no one really knows until the shooting starts. The two countries are headed in the opposite direction economically.

      Once China approaches the US geopolitically, assumptions underlying today’s economy and markets will differ radically.

      • Jake W says:

        the only wrinkle i see there is that i don’t know that the chinese population has the same cohesiveness and zeal for victory as americans did, for example, during ww1 and ww2.

        then again, i don’t think americans have the same zeal for victory now either.

    • Volvo P-1800 says:

      Thanks for the heads-up on Dalio’s book, reading it now.

  8. Nicko2 says:

    It’s gonna be a good year to be an expat living in a low cost emerging economy spending USD. Emerging market currencies are all under pressure, but governments must also balance the the risk of rising inflation. King Dollar will rule the day.

    • drifterprof says:

      I’m not so sure about the USD.

      After DXY peaked in late last November, it’s drifting down, with a couple of windy jumps to the negative. Probably my imagination, but I’m sensing some Boeing 737 Max type tugging on a downward path.

    • Peanut Gallery says:

      What country are you in, and what currency are you spending/holding?

  9. Charles says:

    The last 2 midterm election years had a 10% correction in 2014. There was a big selloff in 2018. There is more inflation now compared to then.

  10. Ian says:

    Looks like there are still a lot of flippers trying to offload houses at prices almost double what they sold for 2 or 3 years ago (or even one year ago for some rural areas). Without the expectation of a continued spiking house market, the flippers may look elsewhere. No idea how much they were responsible for pushing house prices up but it seems likely to have been a fair amount. Without them, a downward ‘adjustment’ seems inevitable, especially as the house build backlog caused by materials shortages eases.

    • Petunia says:

      I don’t know if this is a flipper thing or more widespread. People who can’t get regular credit are being encouraged to buy crypto and lever it 5X to buy property. There are shadow lenders doing this now and it is being pushed in certain “investor” circles. Borrowers use their 20% down to buy crypto then borrow the other 80%.

      Some of the cash buyers out there right now are levered in this manner. If cryptos crash they are going to get margin calls for real cash and that’s a potential weak point in the real estate market. Didn’t know this was going on, but it is.

      • georgist says:

        In a rentier economy only speculation can get you financial freedom.

        Hard work doesn’t pay and what you do get is taxed like crazy.

        This is why real growth is so low, people realize that rentier activity pays more than real work.

      • Lynn H says:

        Good news. Are you talking about offshore money?

      • ru82 says:

        That is interesting. Where are you finding this information. I know the DeFi space is very leveraged.

        • Petunia says:

          The video I watched mentioned a story written by a big newspaper, maybe NYT or WSJ, about a woman who owns a food truck and used her $50K down payment in this manner, because she couldn’t get conventional financing for a home.

    • Lynn H says:

      am seeing more flip houses come on the market unfinished.

      • Lynn H says:

        Oh, also recently saw a real eyeopener, for me. An expensive house in an expensive area with lots of very good quality materials and awful craftsmanship. Asked if the previous owner did the work and was told no- he hired someone.

        The construction workers in that area are now renting small single rooms to work there- can’t afford an apartment or live outside the area. A lot of good craftspeople have left. That area is going to be composed of only rich and poor people. Not a stable mixture.

        • Jake W says:

          that’s what america is destined to become if we continue down our path. we’ll be like third world banana republics with the very rich living in gated compounds and sentries patrolling the properties, while the vast majority outside lives in abject poverty.

  11. Seneca’s Cliff says:

    There is a big difference between the inflation in the 70’s and now. They are the same disease, but the big difference is the patient. It is like a 27 year old navy seal getting a case of salmonella from the potato salad at the local dive bar and an 89 year old geezer with diabetes, heart disease, copd, gout and an ulcer getting the same thing from the salad bar at the old folks home. Same disease but different prognosis.

    • roddy6667 says:

      Excellent metaphor. I’m Boomer, 73 now. I was about 24 when inflation hit hard last time. America was more resilient. The demographics are different now, too much debt, too much wealth disparity.

      • Jake W says:

        and too much entitlement, all up and down. the older feel entitled to their full social security and medicare, no matter how much more it is than what they paid in and no matter how much it will bankrupt their children. the younger feel entitled to “free” school and housing, wall street and the investor class feels entitled to low rates and qe forever, the poor feel entitled to all of the transfers they’re legally entitled to, and so on

        • Ms A Smith says:

          Social Security’s funding and payouts are the most understood.
          Check out how it really works!

        • MsA Smith says:

          Oops! Mis-understood!

          How we take care of one another is a social contract. Like any it can be written and re-written.

          For instance, we are rare (alone) in developed countries in having health care tied to a person’s employer, and having illness cause financial ruin.
          Romney/Obama Care was an attempt to widen one aspect of the “net” for all. Social Security was not meant as a universal retirement plan, but that the wealthiest nation on earth would not let great # fall into destitution while others lit up their dollar bills.
          We had a revolution to get from under the rule of a perpetually wealthy class that contolled the quality of life of everyone else!

        • Anthony A. says:

          Social Security and Medicare are different programs. One is an insurance premium (Medicare) and the other is funding for retirement, in case you are not sure how these programs are run. Many us us have paid into these programs for several decades and expect to collect as per the program’s guidelines.

          This is not an entitlement issue….we paid into the programs and now are collecting per the rules set out by the government.

          If our children want to collect on these programs, they should fund them as we did and make sure the politicians are taking steps to make sure the funds will be available for them in later years.

          It’s really simple, Jake.

        • Jake W says:

          anthony, let’s assume that the money isn’t there, and that wages drop enough that the only way to make it solvent is to either reduce benefits or raise taxes on the working population. why should the working population vote to do the latter?

  12. Alex says:

    The better comparison is the 1940’s where inflation was going up and money supply was growing while shortages abounded (due to war prep/fighting). Interest rates were low too because we were coming up from the depression. Lyn Alden talks about that on her website. In the 1940s I think the solution they came up with was price controls and interest rate ceilings. Of course as soon as those artificial caps were allowed to move freely again, they ran. 1970s is not a good comparison, the 1940s is more apt.

    • Augustus Frost says:

      The 1940’s is not a good comparison.

      After WWII, the US budget was cut substantially through a real peace dividend. Entitlements were low. The debt was high but it wasn’t supported by a fake economy like today.

      There is no real prospect of bringing sanity to the Federal budget, not even a pretense. Not only is the country (as a whole) not interested in stabilizing government finances, there are efforts to create new unfunded entitlements through the “Build Back Better” porkulus bill and similar fantasies.

      In the 1940’s the US was the industrial powerhouse of the world producing real stuff, not the “services” predominantly composing GDP today. The economy is being gutted with no prospect of reversing it either.

      Corporate and consumer debt levels were generally low, as opposed to the stable rags which typically represent corporate and consumer balance sheets today.

  13. Gen Z says:

    The Turkish President is misinterpreting his religion. The religion is not against the concept of interest rates.

    Interest rates is about the money supply and savings rate rather than usury.

    It’s usury, such as high interest loans which is forbidden in every Abrahamic religion.

    • Nicko2 says:

      Turkey is on a wild roller coaster they can’t get off of….

    • RockHard says:

      Occam’s Razor, man. The Turkish President is trying to save his own ass, whatever reason he tells the world to explain what he’s doing.

    • Alex E says:

      As a practicing Muslim I can tell you that the notion of “interest” is abhorrent in all its faces to the religion of Islam, including the “concept of interest rates” (time value of money justifying rental fees on loaned funds).

      Usury is the “use charge or rental fee charged on the dollars someone loans to another entity”. Our religion forbids paying it or receiving it.

      Modern notions of ‘usury’ convey specifically high, or outrageous rental fees on dollars, but Islam makes no distinction between a high or low rate.

      Here’s a link to what the Bible says about charging interest: https://www.openbible.info/topics/charging_interest
      or you can just google “What does the Bible say about charging interest?”

      So you are partially correct that high interest loans are forbidden by every Abrahamic religion but to be fully correct you should say “high or low interest loans” are forbidden by all Abrahamic religions (Judaism, Christianity, Islam).

      The Qur’an says be ready for a war between the person that deals in interest and God. The Bible says whoever makes money by charging interest shall lose it. There’s animus there. Our Creator despises interest and has said so in all His declarations to mankind (Torah, Gospel, Quran). The guidance has not changed, however much people wish to connive and make allowable what God has forbid.

      Everyone’s soul is ransom for their actions. Once you’ve been told; the onus is on you (humans) to conform. I can’t answer why others don’t follow it, and I don’t need to…I just try to stay away from it myself.

      I can’t choose not to use dollars while living in America, but I can choose not to invest in the stocks of companies that make money through interest (most), I can avoid mortgages that utilize interest (most), I can choose not to buy bonds, etc.. There are alternatives for those that seek them out.

      • Wolf Richter says:

        Alex E,

        OK. But Sukuk bonds have been hot for years. They conform to halal. So the holder doesn’t own a debenture that is backed by an asset, but owns part of the asset itself. And the owner isn’t paid interest, but is paid part of the earnings. In the end, it comes out to be about the same. Aren’t we just using different words here and slightly different concepts with the same outcome?

        The ultimate question is: if you invest in something, you want a return, but how do you structure that return? Conversely, if I’m a business owner and I need capital, I need to offer a return to attract investors.

      • Richard says:

        Well said.

  14. Joe says:

    I don’t see the yield will rise significantly because when the yield starts to rise with interest rate hike, the hedge funds start seeing not much different between their high risk high yield bonds and the safe heaven treasuries. So they will move their investment across, then pushes down the yield again.

    Also, the margin debts will start facing margin calls as tapering and interest rate rise. I can’t see they can cough up more cash to stick with their bets, hence more selling pressure in equities.

    As the Fed reduces the QE to QT and rate hikes, the liquidity crisis will get intense, more dollar shortage as another Evergrande defaults ripple through which eventually will push USD higher and every central bank suffers even more.

    We will see but I think around Feb/March, the financial market will show early signs of earth quakes.

  15. Michael Engel says:

    1) Cola is cumulative. In 2009 and 2010 Cola was zero. There was
    never a negative Cola.
    2) The current Cola at 5.9%. It’s less than half of Colas from 40 years ago. It peaked at 14.3% in 1980 and 11.2% in 1981. Cola decayed gradually until the 2022 spike.
    3) Between 2020 and Dec 2021 the world went crazy. In US 800,000 didn’t survived and millions died due covid.
    4) SPX monthly had DM flipped in June 2020, TD Setup in Jan 2021
    and a countdown #10 in Dec 2021. Not much is left.
    5) A bullish rally in Jan 2022 might be followed by two hiccups. By mid 2022 SPX will run out of fuel.
    6) We don’t know when SPX twill have a change of character.
    7) Nillnot last forever.
    8) After a Major Weakness JP might boost inflation again for 2024 election.

  16. phleep says:

    As in 60s-70s, both political parties participated in the runup to inflation. Consumers in that earlier time went utterly stupid-crazy with wealth they didn’t know how to handle (new car every year, new wife every year, crazy stoned kids, craziness in the streets, culminating in Manson family, etc). This time, the inflationary spend-easy euphoria should hit a wall faster, unless the Fed keeps goosing the punchbowl. If the latter, it is like feeding straight booze and steroids to an old sick codger who’s been addicted and addled for years. But a road back to vitality seems fraught with difficulties by now. My parents’ generation in the 60s middle class had lots of wealth, easy to get a house and cars, etc. Lucky for them they settled down with nice real estate before the 70s raged. So having a few assets like that (on good buy-in terms) become generational wealth.

    If the inflationary euphoria this time hits a wall faster, as in any form of bankruptcy, we have new buyers of last resort: the drastically more filthy rich (globally) who will grow even more asset-bloated. That could devolve into a new feudalism. Imagine the Roman soldiers being stripped of assets and falling into debt-peonage, losing the family farm and going onto the collective estate.

    • phleep says:

      Once scarier alternative to a new feudalism is a new Russian Revolution scenario. Not unlikely in a country armed to the teeth with military style weapons. With all the complexity, many lovely scenarios beckon. I would rather people were more lazy, torpid and slowly impoverished, than some alternatives.

    • TimTim says:

      Communism ends up becoming a form of feudal system.

      The right to power for the few being cloaked in ideology rather than claimed birthright.

      Does it matter whether the court is the lord’s or the commissar’s if one is still a peasant, Comrade?

      All that is needed for the transaction into the next autocratic system is for the voting population to believe whichever attractive representative, of a moribund extreme ideology, will take away their pain.

      Once past that point, their pain will become of decreasing relevance, as will their votes.

      Consider this, over the past 1000 years, what proportion of the time was spent under some form of autocratic rule? Apply that to any country, any continent.

      Then consider what proportion of the time has been under universal suffrage, male and female combined?

      The sad conclusion could be drawn that democracy is the preferred (certainly is mine), but not the normal state of affairs.

      • historicus says:

        “”A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.” ”
        DeToqueville 1840s

        highlight….”always collapses over loose fiscal policy”

        • futuricuss says:

          Update has those largesse voters marginalized by donors. The donors buy votes, and pay off their Congressional intermediaries, with billions of tax dollars raised through conventional receipts or through siphoning off their share of inflated fiat currency. They are so patriotic that they offshore much of what they get.
          In the 1800s there was an American System.
          What to call the slick new 2000s version?

        • historicus says:

          Futuricuss
          “In the 1800s there was an American System.
          What to call the slick new 2000s version?”

          Don’t have to go back that far.
          Thatcher always said “Socialism fails because you eventually run out of other people’s money.”
          That was in the 1980s
          What’s new and different?
          The central banker printing money to fund the Socialisms coming down the pike. Thatcher in the 80s, and most people, would never have imagined such. Yet, here we are….TRILLIONS created for doling out and socialistic programs…with more in the pipeline. Accepted first because of emergency (2008), but now common course. Bernanke’s “temporary” QE seems near permanent. There is no “running out of other people’s money” now, it seems.

        • Michael Gorback says:

          Every election is an auction of favors.

        • Wolf Richter says:

          I’m going to steal that one. Is this yours?

        • Truckman says:

          I knew this was coming after Thatcher. She destroyed the unions in the UK, and in particular the mining and railway industries, to ruin socialism. What she got wrong was expecting the free market to fill the void. Well, there wasn’t a free market in the UK. People weren’t free either to move or start new businesses, because of mortgages, inflation, and government red tape. What happened was crony capitalism and generations in some areas on social welfare. Unsurprisingly, they ended up voting for more welfare from Blair. And the only way the “Conservatives” have regained and held power is to be at least as generous as Blair. Watch what they do, not what they say.

        • NBay says:

          Yeah, you do have to go back farther.

          Thatcher stole that phrase from Dumas.

          “What is business? Simple. It’s other people’s money” -Dumas

          He was an ace businessman and easily a 0.01%er of his time, among other things.

    • drifterprof says:

      “Consumers in that earlier time went utterly stupid-crazy with wealth they didn’t know how to handle (new car every year, new wife every year, crazy stoned kids, craziness in the streets, culminating in Manson family, etc)”

      I don’t remember it that way. I had a couple old klunker cars in high school, on which I learned a bit of mechanics. Went on some low cost road trips with stoner pals, but it was opposite of consumer wealth binging.

      Got B.A. in Math and taught math in Peace Corps (West Africa) for a couple years. Came back and got my first real car, a two-year-old Plymouth Duster for about $1,700, which I kept driving for a decade or so. Lived in cheap apartments for a long time, slowly building a work history on moderate wages.

      Most people I grew up with in the middle class were not stupid-crazy with wealth. The rich people lived up on a hill or other exclusive areas, and gave off vibes like they were a superior race.

      A lot of us were in a kind of culture shock because our country engaged in an unnecessary geopolitical war that people were duped into supporting out of fear that Soviet and Chinese communism were taking over the world.

  17. LordSunbeamTheThird says:

    The best and only way out for the US is to allow high inflation to devalue the dollar and bring in a controlled landing a few years from now imo.

    Also I know its not a percentage and has no graph, but has anybody seen
    The Silence Of The Bernanke (released late 2021 ImDB rating 2)

    because he was quite the morning rooster before, with his so modest book “The Courage to Act”, and yet now , so strangely silent even as his fantastic plan continues.
    I wonder why?

    • Jake W says:

      how does that allow a controlled landing? the spending demands aren’t going to abate, if anything, they’ll get worse. so whatever devaluation occurs will be outweighed by new spending and debt.

      • Augustus Frost says:

        It doesn’t compute because it’s a complete fantasy.

        The post above comparing today to the 1940’s, I have read this idea elsewhere recently. The only significant similarity is that the Federal debt was high then and now as a % of GDP.

        So somehow, someone got the idea that because the US government successfully ripped off savers and creditors then, it can do it a second time now while the country gets richer by living above its means, forever.

        Good luck with that.

    • The Real Tony says:

      Ben was the guy who destroyed the business cycle that everyone used to read about in economics books.

      • historicus says:

        Central bankers now better than the free market, just ask them.
        The Fed has interceded in free market normal activity…..cycles, corrections. They have sought to remove the inconvenience of these natural occurences.
        These cycles and corrections ….. correct, hence the name. They flush the excesses and the poorly financed, leaving things in a better condition. The central bankers have denied this, and thus excesses are pent up, and the eventual flushing takes on systemic risks.
        Enter the central banker to accrue more power, self author expanded mandates.
        Notice the Fed promotes 2-2.5 % inflation. That is brand new from the 2008 debacle. That was their own doing, self authored, unquestioned due to the “emergency” of 2008.

      • ru82 says:

        Exactly…..someone needs to tell Lacy Hunt this. He keep calling for deflation. Last May he said we would have deflation by the end of 2021. Instead we have over 6% inflation.

    • GSH says:

      Agree. Watch what they are doing, not what they are saying. Sustained real inflation about 10% per year for years seems a likely scenario.

      I do not see Powell suddenly become a Volker-type hawk. Our fiscal spending will remain out of control. We’ll continue to manipulate the inflation indices to keep them under/around 10%. Taking out a 4% 30 year mortgage still seems like a winning proposition even on an overpriced property.

      • RockHard says:

        I’ve been wondering this lately. It’s almost like if you can sustain the cash flow, borrow money now at a low interest rate, pay it back over many years.

        Yeah I know, “If you can sustain the cash flow” is a big if and leverage is the quickest way to go broke, but it sure looks like that’s the personal finance plan the fed is encouraging.

  18. Yort says:

    At some point there is going to be a “Hangover Year”, be it 2022, 2023, etc. We are living through the “Inflate or Die” era of monetary and fiscal madness. So much hidden leverage on highly inflated assets. SBLs on inflated stocks, mortgages on inflated houses, land loans on inflated property…the leverage and margin that the entire “Inflate of Die” scheme exists upon is now a “mental house of cards”, and I agree with Wolf, it could be something other than the Fed that topple it and create a financial crisis that will not be
    very predictable in timing or nature.

    Yet we know what the Fed will do, attempt to buy it all to prop it all back up once again…which if it works, I suspect will be the last time as unless each continent works together, there can be no easy global monetary “reset” as “someone” has to lose in an “FX Battle”, and I don’t think China is going to just let the US win and allow the Fed and govt attempt to bail out “Everything” by the tune of hundreds of trillions to plunder the world’s best assets…

    What a obviously predictable mess…that could have been managed with a higher probable success rate… HAD the Fed had acted 12 to 18 months ago instead of being intellectually stubborn and not admitting to making a monumental inflation policy regime blunder of epic global consequences…

  19. Jake W says:

    it seems that the majority of commenters think they’re going to keep doing what they’re doing until we have hyperinflation, and the final stages of a crack up boom. wolf thinks the political pressure to do something will override that.

    i guess we’ll see.

    • Yort says:

      Our political posse are going to “Solve” inflation by printing more money, as per TheHill article today explaining how to lower meat inflation by printing and “granting” 1 Billion to small meat processors.

      Political Inflation Easy Button = Print moooore money, and allocating to meet political re-election goals…

      The White House on Monday announced plans aimed at addressing rising prices for meat and poultry, including setting aside $1 billion for smaller producers.

      • ElbowWilham says:

        George Gammon has been predicting they will try price controls like they did in the 70s, which worked for a couple months before causing even worse inflation.

    • Augustus Frost says:

      There will be a major deflationary asset crash at some point if this is attempted.

      No one can stop it because of excess leverage and people are human beings, not robots.

      The FRB and government acted a lot faster in 2020 versus 2008, but no one can act fast enough to prevent a deflationary crash once sentiment changes.

      From another angle, there isn’t a single individual with the power to create hyperinflation. The FRB is not a person and committees (that’s the FOMC) disagree under conditions of duress, all the time. Look at the EU and Eurozone. The FRB cannot “print to infinity” without “buy-in” from Congress, White House and other constituents. FOMC members aren’t robots either and aren’t about to act radically contrary to the current environment. It’s career suicide and no one is going to do it.

      It’s been easy the last two times (2008 and 2020) because the perceived cost of “printing” and “stimulus” was minimal or non-existent.

      When this perception/reality changes, there will be political conflict. People will disagree again and the “print to infinity” option won’t be such a no-brainer.

      • Jake W says:

        great comment. that’s just it. the cost of printing and stimulus was always there, but its effects were hidden, so they weren’t perceived, as you said.

        now, even ordinary people (i’ve been talking to a lot of friends and acquaintances about this) are at least drawing the connection between printing and deficit spending and inflation. so any calls to print more will be seen as calling for more inflation.

        the cat is out of the bag. the perceived cost is no longer zero.

      • Saltcreep says:

        The problem, I suspect, Augustus, is that the inflation we will eventually be getting (not necessarily now) is not the inflation caused by recent actions, but rather the latent inflation waiting to be released, that comes from actions taken in the more distant past.

        For decades central banks and governments have dedicated efforts to continuously sustain and inflate the price of assets that are held by things like pension funds and social security programs, so as the years roll on there is a locked in and rapidly growing increase in the number of currency units that must on an ongoing basis be converted from pricing of financial and other assets to pricing of consumption goods and services through the ongoing maturing of past promises.

        And I don’t believe anyone has the courage to go out and tell people that the income they have planned for will be drastically slashed in nominal terms (even if the effect with inflation will likely be similar in real terms).

    • gametv says:

      biden met with powell and after that he started talking about tightening monetary policy. the democrats will hit a buzz-saw if they dont get inflation tamped down by the next election.

  20. Winston says:

    “Over the past few meetings, the Fed suggestions went from no rate hikes in 2022, to three hikes in December. It went from not even discussing the end of QE to accelerating the end of QE.”

    Which shows, as if more evidence were needed, that they have no short term let alone long-term projection accuracy which is to be expected based upon their past performance.

    Videos still exist online of the Bernank advising not to worry about the housing market just before the crash. And search for a graph of the IMF’s economic projections versus reality over the years to see what MMT models gets you. It’s like a drunk and blindfolded captain of the Exon Valdez piloting a supertanker.

    Of course, this garbage is allowed to persist because those in a position powerful enough to do anything about it greatly benefit from it.

    • Peanut Gallery says:

      What do you expect the Ben Bernank to say in that type of situation? If he would have said anything otherwise, he himself would have been the catalyst for the housing collapse that would have come anyway.

      I sincerely doubt that he didn’t know it was coming. He knew. He was just doing his “job”

  21. John says:

    Wolf
    What stands out to me is rates staying low. Quantitative tightening or selling by the fed or letting bonds roll off, can be delayed. No more purchases and no more front running with bonds. I see a wtf!? and a reaction by the fed. A return of the vigilantes? (bonds)

  22. Tone says:

    This is all so confusing, but comparisons aside…there has been years of manipulation…There is a generation that does not know what interest rates are…there is something wrong with all of this.

    Cheers

  23. Old school says:

    Dr. Yardeni just released the latest data on the big four central banks balance sheets. Looks like we are peaking at $30.8 Trillion. Year over year increase 10.6%.

    Hard to say about timing. It takes a while for central bank policy to work through the system, but stock market will anticipate a recession early.

  24. Crush the Peasants! says:

    Wages are also inflating and so the ability to make that assumed to increase monthly payment is also improving.

  25. Jake W says:

    i think the one factor being overlooked by many is the new populist movement brewing. people like to say that powell was forced to change course in 2018 because the “stock market couldn’t handle it.” but that starts from the premise that the inflated stock market was the “right” price. perhaps the post-taper price was the right price. who knows what the right price is absent all of the manipulation?

    those same people now say that he’ll be forced to change course yet again if the stock or housing markets decline.

    but back in 2018, there wasn’t out of control, raging inflation. even the mainstream media has started to report on it and how the stock market is largely owned by the rich. so if he changes course this time, despite raging inflation, it’ll be clear he’s doing it solely to protect the stock market, as opposed to the “economy” in general, as he was able to claim in 2018.

    i don’t know what’s going to happen, no one does, but i think the political anger which is growing more and more palpable could have an unanticipated impact.

    • Old school says:

      One way to look at it is the stock market tends to give a long term return of about 6% above inflation with a standard deviation of around 17%.

      We are in a different situation now with Schiller PE at 40 or Schiller earnings yield of 2.5% or negative 3.5% real with standard deviation about the same. As soon as trend breaks, people are going to want out.

      • gametv says:

        i agree that this is partially about chart trends. there are some very long chart patterns of bond prices higher and yields lower, but once those charts get broken, there will be a flood of selling and much higher interest rates. and the fed will be helpless to stop it unless they plan to announce more QE in the midst of high inflation, which they cant do. the bankers brought this upon themselves.

    • historicus says:

      Jake
      ” who knows what the right price is absent all of the manipulation?”

      When the manipulation is “absent” then maybe we will know.
      In Dec 2018, inflation was 2% and Fed Funds were 2%. That is right there in the range of historical norms. The markets couldnt handle it……but to your point, the markets were at that point headed to normal evaluations sans manipulation, and that level was lower. Apparently the Fed is afraid of reality and the talking heads push the assumption that spiked equities must be defended. If they must be defended, they thus are supported by the manipulation and artificial. To the benefit of some, yet with the detrimental effects of that support (inflation) to so many others. Punishing.
      Hayek said
      “When central bankers decide, they intentionally assist one group at the detriment of another.” 12 years now.

  26. NJB says:

    The prize for the most deluded central banker doesn’t go to Jay Powell. The winner is Philip Lowe, the Governor of the Reserve Bank of Australia. He is still insisting that the official cash rate will stay at 0% until at least 2024. Meanwhile house prices are surging and inflation is debasing everything.

  27. Old school says:

    Ran the numbers. The big three central banks have increased their balance sheets at just under 30% annual compound rate for the last 14 years. That is such a high growth rate, it seems impossible that they can stop for any substantial length of time without financial system imploding

  28. NJB says:

    “The Bank of Japan ended QE in May 2021 – the longest-running money-printer has stopped printing money”.

    It’s my understanding that the BOJ is still committed to yield curve control, keeping 10 year government bond yields within a narrow bound around 0%. Given this, I don’t believe it has really ended QE as it stands ready to buy government bonds if yields rise above its upper bound. I could be wrong, but this is my understanding of the situation.

    • Old school says:

      Fed is going to have to come up with a more extreme policy than what they had. Maybe yield curve control, capital controls, but I think maybe weaker dollar policy as trade balance is running wild.

    • Wolf Richter says:

      We’re looking at the BOJ’s actual balance sheet, not what the BOJ says it might do in the future.

  29. georgist says:

    Wolf do you take into account shadow banking (eurodollar) when you make an holistic analysis? People like Snider are saying the Fed is not the USD central bank and that they lost control of USD creation. Therefore they’re not driving the bus.

    • Wolf Richter says:

      I stopped paying attention to Snider a long time ago. He’s in his own world.

      • georgist says:

        Okay so you think Snider is over the top.

        But what about Eurodollar itself? Do you believe this is significant, that the outer USA banking system is bigger than the part the Fed controls?

  30. sc7 says:

    I see a FOMO blow-off top coming this spring in residential real-estate. There will be some insane bidding wars and massive overpaying going on February-June, especially that the continuation of COVID is setting in more permanent WFH for more people. The Realtor narrative of “getting in while rates are low” will be strong, combined with a still ridiculously low level of inventory.

    If rates climb themselves above 3.5% by the Fall, I think the cooling off may finally arrive. As others have mentioned, I don’t see bond yields spiking enough to get rates high enough >4.5% to really trigger an impending strong correction, but even a 50-75 bp drift upwards may be enough to cool things after this insane runup. The Case-Schiller index is starting to look an awful lot like the early days of the last bubble.

  31. ivanislav says:

    The Fed:
    1) Inflation is transitory, no need to do anything
    2) Some inflation is good, we shouldn’t do anything
    3) Inflation is happening, we’ll do something in the future*
    4) Inflation happened, it’s too late to do anything

    * We are here

  32. The Real Tony says:

    From what I’m seeing The Bank Of Canada lied and never really ended QE. Check all the figures for yourself.

  33. Seneca’s cliff says:

    There is another big difference. When I was a teenager in the 70’s nobody I knew, or even met lived off the income from investments directly. Now half the people I know live off investment income in some form or another.

    • Dan Romig says:

      S’s C,

      Ditto.

      Now, in my late fifties, I am one of them.

      One thing my parents did in 1968 was buy a lot in Roseville, MN, which had a high water table and was still undeveloped. Then, they hired an architect in 1969 to design their ‘Dream Home.’ And finally, they bit off a big chunk of a mortgage to finance it in & have it built in 1970.

      But, what would not have been a prudent decision for two children of the 1930’s depression era, was at that point in time simply a calculated, and intelligent way of using the coming wave of inflation to live well and build equity in our home.

      Despite the crazy home prices that are now in the USA, is it another chance, and opportunity, for history to repeat itself?

    • georgist says:

      The USA is a rentier economy.

      Exactly why people fled Europe for the USA.

    • Seen it all before, Bob says:

      SC,

      My parents and grandparents were solidly middle class and lived in middle class neighborhoods in the 70’s and 80’s.

      They were chasing yields very much like today.

      In the 1970’s-1980’s:

      1) Their CDs, long term bank accounts were making 8%-12%.
      2) They purchased US Savings bonds paying 6% and gave them as gifts.
      3) Nobody I knew had a broker and there wasn’t easy access to stock purchases. Everybody had a guaranteed pension so they didn’t have to save as much for retirement. 401Ks did not exist. Most invested in the company stock they worked for through Employee Stock Purchases.
      4) They all owned a primary home but nobody owned a fleet of rentals.
      5) As far as RE, some invested in Real Estate Limited Partnerships which are similar to REITs.

      They were more conservative investors when yields for safe investments were much higher. With guaranteed private pensions, there wasn’t any active investments for retirement.

      Their example caused me to be a saver. However, not in the same way they did at 0.1% in a Premium bank account.

      • Seen it all before, Bob says:

        I remember as a pre-teen and teen driving miles around town with them to find the Savings and Loan that paid the highest interest rates for a long-term account.

        They still did that in the 1990’s and 2000’s after a moved out.

  34. TJ says:

    Alot of people on this board seem to think the Fed has all the control and can dictate what happens next. But in my opinion, the Monetary policy makers are only reacting to the Fiscal policy makers, who have been over-reacting to Covid for the past two years with irrational policies and irrational spending, which has created a moral hazard, and magnified the imbalances in our economy.

    The political winds seem to have shifted over the past 6 months, as most people are becoming fed up with Guv overreach. However, we now have a new monkey wrench being thrown into the mix, (a new Covid variant) and with that increases the possibility that the Fiscal policy makers will once again assume they have a mandate to “do something,” which will only end up exacerbating the problem.

    So where will rates end up? Follow the lame-os in D.C.

    • sc7 says:

      Great point, not enough focus is on how the stimulus checks were unnecessary, PPP was abused, and the extended unemployment went on for far too long.

      The only response they really needed to make was to extend unemployment, possibly give the extra money since some red states have abysmal unemployment benefits. That’s it. So many other programs just needlessly gave people more money than they ever had.

      Not enough blame for this inflation gets attributed to congress’ response, IMO.

    • Peanut Gallery says:

      Let’s get real everybody. Yes, COVID is a real respiratory illness that is more severe than influenza, but it was a well timed and coordinated excuse for reckless deficit spending. And it still continues to be so.

      BBB was blocked, but that isn’t to say that more fiscal stimulus can’t come.

      Like TJ has said, it isn’t just about monetary policy but the double uppercut punch of both monetary and fiscal stimulus together.

    • Jake W says:

      tj, chicken and egg. the fiscal spending may not have happened without the promise that those trillions would be monetized.

  35. MiTurn says:

    “But this time, the taxpayer is mostly on the hook for those mortgages, not the banks, when the market turns south.”

    Wolf, your comment reminds me of a quote I lifted from ‘When Money Dies’ by Adam Fergusson: “With inflation alone can a a government extinguish debt without payment, or wage war and engage in other non-productive activities on a large scale: it is still not recognized as a tax by the tax-payer.”

  36. Michael Engel says:

    1) In the early 1980’s, when the economy faced the abyss Cola peaked.
    2) Deflated labor unions and Cola accumulation helped president Reagan.
    3) When defeated union workers were out in the street, next to BK USS
    McKeesport PA plant, retirees had more money to spend.
    4) Cola accumulation and the dreaded G-word, – glut, – in the oil sector gave R/R a booster :
    5) Cola accumulation : 6.5%/ 1978 + 9.9%/ 79 + 14.4/ 80 + 11.2%/ 81 + 7.2%/ 82
    + 3.5%/83 and + 3.5%/ 1984 ==> 56.1% total.
    6) Blame Carter !!

  37. SocalJim says:

    For many years, the theory was monetary policy could be very easy even with low unemployment because international trade was disflationary. That theory just blew up. You see, turns out international trade has turned inflationary. And, it is more than COVID.

    Furthermore, to turn international trade disflationary again, nearly all central banks would need to tighten monetary policy together .. and substantially. That is never ever going to happen. Never.

    Fact is, most central banks will only be willing to do a few token hikes and that is about it. Figure it out. It is to a country’s benefit to not raise rates while everyone else does since you would get disinflationary trade and low rates. That is the game.

    The FED has little control over this. You can thank the free trade policies of the administrations prior to 2016 … they did this. Especially, the ones in power from 2008 – 2016.

    Economists do not understand what is going on … FED rate hikes will cool inflation a little, with a recession. There is no way they will trigger an inflationary recession, especially with elections on the way.

    It is all about hard assets. Hope you have good real estate investments … you will need them.

    • Anthony A. says:

      I’m living in our real estate asset. My daughter and her husband are doing the same thing in theirs. We don’t see any other changes to that plan for a long time into the future. We are using these assets as “homes”.

      Should we be doing something else with these assets?

    • Rowen says:

      Yes, Greenspan said he could keep interest rates low because both offshoring and “worker insecurity” were disinflationary.

      Both of these forces are unwinding. Supply chains, covid, boomer retirement, decreased net immigration, Chinese dual circulation, Belt and Road, etc etc.

  38. Michael Engel says:

    Turkey deflate labor, boost export, demand 25% of foreign fx to
    the gov coffer, unlike 100% in China.
    On Feb first 2022 China will enter the year of the Tiger.

  39. historicus says:

    Central bankers “Face” raging inflation?

    I have it on good authority they are keeping a “close eye” on it.

  40. Lgametv says:

    I keep saying this, but interest rates are determined by both supply and demand. As the Fed cuts bond purchases, along with all the rest of the central banks (except the ECB), demand is reduced. But the bigger issue is that supply repression, via depletion of the Treasury general account, is now at an end. So in the coming months, the Treasury needs to issue a ton of debt to fund deficit spending and also to bring the balance in the general account back up to a more normal level.

    Bonds are going to sell off very hard over the coming 3-6 month time period. The only thing that keeps the US Treasuries so low is that there is still a ton of negative and near zero interest rate debt issued by the ECB and others. Comparative interest rates keep rates down in many places.

    • COWG says:

      “ Bonds are going to sell off very hard over the coming 3-6 month time period“

      Perhaps…

      But who are you going to sell to?

      If you try to sell your bond in a rising rate environment, you are going to killed on the price you have to sell at in order to get rid off it if you can find a buyer…

      Or you will have to hold to maturity at 1%…

      Unless you can see another way, which I would be interested to hear…

      I think the Fed will very slowly raise rates to give bond holders time to rotate out before getting crushed…

  41. Janna says:

    Thanks for mentioning farm land. We would love for the price to go down. That would make for opportunity. We bought at $5k/ac and for our area, that was overpriced at the time. Now we could easily sell for $12k/ac even though it is worth closer to$10k. Auctions in our area are selling at $15/ac. People have lost their minds, but it’s just so difficult to get any and when you do find it available, it’s either 10 acres or enough to cost a million or more. I’m not sure I want to be land poor this close to retirement, but if the price was right, we would take the leap.

  42. Michael Engel says:

    Ilan 1M, AAPL $3T day

  43. The caveat to inflation, all this printed money remains out of the economy, sitting in excess reserves, and over monetized spending. Should the GOP cut spending in 22′ the avenue to successfully deploying that money shuts down. Despite the availability of credit, new housing is stuck. The biggest issue is where do we put those homes? Actually California has a low property tax rate, the problem is the high appraisal rate. The entire US housing industry will be like the NY city apartment market, somebody has to die before somebody new can move in.

    • gametv says:

      California has a number of factors – illegal immigration, Prop 13, poor land management policies that are causing land prices to remain high. we really need to need to have a high tax on undeveloped land, that would cause more land to be developable and that would create jobs and provide more homes for people to buy at more reasonable prices.

      but the rich that own properties dont want that.

      i have to stay in los angeles until my youngest daughter graduates high school and then I’m moving. Thinking of even exiting the country. It is run by greed and stupidity at this time.

      • Ann Drake says:

        “ a high tax on undeveloped land, that would cause more land to be developable”

        Wrong! Completely wrong! In California, the problem is zoning: you cannot “develop” land that isn’t zoned for it. The cities and counties do not want to zone land for housing. Trust me on this one. Our family land has been directly adjacent to a CA city for *5 generations*.

        For *5 generations*, we have been denied the right to develop. I could go on and on about this! The city has added 70,000 people to the opposite side of town, but not let us in!

        Yeah, we are fed up! Why, you ask? Because, they say, our property is “prime ag land” read free green zone.

        The truth is: ours is worn out beach sand..the other side of town (where they are putting all development) is rich delta peat on which you can grow anything.

        It’s nothing but $$ politics.

        • Thanks AD. I am sitting on a prime area vacant lot which has lost value since GFC. While available land such as mine sits idle, the city is approving high density projects in the downtown area.

  44. RockHard says:

    > But when mortgage rates reach the certain magic level, home sales begin to fizzle, as buyers can no longer afford the payments at the higher mortgage rates and at those sky-high prices. Something has to give for sales to take place: price cuts.

    This is interesting timing, I was talking to a Realtor this weekend and she claimed that she is seeing sellers have to cut prices to get a sale done, for exactly that reason: the comps might support what the seller is asking, but the market is fresh out of buyers at that level. Sellers who really want to sell are having to take a price cut to get rid of the house.

    • DougP says:

      Real estate is local and I don’t doubt that you are seeing that where you live. In the SF Bay area however, homes are red-hot right now with lots of demand and money and very little supply.

      A friend just sold 3 weeks ago, a rental home for 40% over asking. 31 offers. Appraised for 150K below purchase price so the buyer just put more down. Done. Must be nice.

      Great for him but what it says about the economy in general is quite worrisome.

      • RockHard says:

        Yep it is local and anecdote isn’t data. Denver cooled off about 6 months before the 2008 crisis really hit, but history doesn’t repeat either, it just rhymes.

        It is quite worrisome. SF can sustain the buyers a little longer than flyover country.

      • Jake W says:

        what it says to me is that people are levered up the wazoo based on the inflated value of assets, and they are using that inflated value to buy even more assets.

        when the value of one asset class falls in that environment, it becomes a domino.

  45. Jim Cramer Fan says:

    Oh my what a day! Apple hits $3 trillion and Tesla adds another $140 billion. We’re only in the second inning of an epic bull market. The best is yet to come. Hold on tight, folks!

    • Old school says:

      The big lesson that’s going to be learned from this 14 year episode is ZIRP causes an asset bubble and does nothing for real economy. When bubble bursts it will kill economy and Bernanke, Yellen, Powell will get the blame in the history books but all will die multi-millionaires.

      • Jake W says:

        yeah, but will they die multi millionaires of natural causes, or will they fare like louis xvi? people think america is exceptional in that those sad, predictable events from human history can’t repeat themselves here. they can.

  46. Bobber says:

    I know this is unrelated, but is anyone else experiencing problems with Amazon? I’ve never had any problem with them before, but three of my last last four orders were problematic. The system said two were lost and one was delivered, but it was not. Im not sure if this is my bad luck or a systematic issue at Amazon that could impact earnings.

    • restingbetchface says:

      They had something about “Weather affecting deliveries in your area!!!!”. I messaged them to remove it because it was pure BS and mind-control—the weather was absolutely beautiful. I asked them to disclose what “weather” was affecting my area—they couldn’t.

    • El Katz says:

      Bobber:

      IMHO, bad luck. We have no such problems (but we also have no porch pirates).

    • Lynn H says:

      There are news reports of robbers striking delivery trains carrying boxed goods outside of LA and throwing packages off the trains. Packages addressed to buyers. Not sure to what extent or how relevant. Also, news stories of a couple FEDEX or similar delivery systems having rogue drivers dumping truckloads in the woods. Not sure if revenge or for later pick up or what.

    • VintageVNvet says:

      Every biz has ”covid” issues at this time B!
      Small local mkt where friend works has half their staff out yesterday, other places where I shop similar,,, or so they say, even with them offering increases in pay.
      Airlines offering double and triple pay recently…
      Etc., etc.
      IMHO, virus will be endemic sooner than expected, may be so already, as all reporting seems to lag a week or so at this time.

    • Swamp Creature says:

      I just ordered some books from Amazon. No problem.

  47. carlos leiro says:

    hello wolf
    In reality there is more curiosity about the economy than interest to obtain money.
    There is something that I have not read and I think it is really important and I do not know how much it can affect students and those who lend them to pursue a university career.
    As a young man, it was shown, in movies about ordinary people, that parents saved to pay for their children’s university studies.
    Today I believe that for most homes it is ancient history.
    I know that the repayment of those student loans is hard for the young and not so young who have to finish paying.
    How do these inflation rates affect those who are paying their college loan? Is it an important value that drives this sector of the economy?
    Greetings to you, happy new year to all!

  48. SnotFroth says:

    I’m in the market for a house and I noticed something interesting recently. The listing sites are becoming flooded with new construction and almost all the new construction listings show price increases, whereas almost all the existing home listings show price cuts. I saw one yesterday from ZillowOffers that was bought at 600k a few months ago and is now listed at 540k.

    I have a knack for buying at the top and selling at the bottom of any and all markets, so you’ve all been warned.

    • RockHard says:

      Zilllow Offers went through a very well-publicized blowup where they overbid for homes and lost their shirt. One down the block from me sold for 10% less than they paid.

      • El Katz says:

        The new builds that go through price increases are reflecting input cost increases as well as added extras by the builder.

        As an example, the base price of the house (initial listing) did not have recessed lighting in the great room. The builder adds that popular amenity and then adjusts for the $200 per pot cost + profit. Then, as construction continues, the builder adds a “luxury tile” package for $20K and then kicks the price up accordingly. It’s nothing new.

        Zillow isn’t a good example…. they were stupid, using their “Zestimates” to bid on homes that were “forecast” to increase in value and paying top dollar on those flawed estimates. They also didn’t sort out the fact that sellers lie about the condition of the structures and they, as a deep pocket corporation, couldn’t run the risk of lipsticking necessary repairs – which most people grossly underestimate the cost of doing. One bout of black mold or foundation problems can be pretty traumatic.

  49. nick kelly says:

    The Fed’s slow response is creating more eventual grief for the market, and by eventual I mean in 22.

    Apple hits 3 trillion in first days of 22 but weirdest of all, Tesla up 13%.
    Is there anyone so technically illiterate they think T has some proprietary tech, a ‘moat’ to insulate it from VW and Toyota, who are neck and neck for largest auto cos in the world?

    ZH has turned extra strange, harder to find economic stuff, but there is a finance piece saying Tesla is all that’s keeping Cathy Wood’s Arc fund alive. If already lagged the market by double digits even with a huge boost from its T holdings. If T drops 30% its done.

    So after the Fed’s announcement that there would be hikes in 22, the market went further out on the limb.
    If JP had said first hike Jan 1, he might have spared the market some of the grief from the inevitable correction. The pain from falling out of a tree does not vary arithmetically as the distance fallen. 5 feet, probably OK. 10 feet probably not, 15 feet…could be fatal.

  50. Rudy says:

    Wolf, can you address the fact that Nancy Pelosi just purchased a few million dollars worth of call options? What the heck? Does she know something we don’t? I read an article that the GOV will fight to keep the stock market up until mid term elections are over. What’s your read on that?
    Are we living in times where politics drive markets at whatever costs? This is not a free market capitalism at all. But that’s a different topic

    • Wolf Richter says:

      Why the heck do I need to address when someone buys some options? This happens a gazillion times a day. It’s just that it’s disclosed when Pelosi does it.

      Most options expire worthless.

      • sunny129 says:

        ‘Most options expire worthless

        Agreed!

        But making money on options either puts or calls, depend upon two vital factors. Predicting Trend )up or down) and exact timing, very hard to do! It would work if there was no suppression of price discovery! They did work for me, most of the time prior to March ’09!

        With Fed’s permanent put since ’09, any one who has gone bearish has gotten demolished. Besides Mr. Powell can print Trillions out of thin air to keep the bubble. like he did last March(’21). He can create SPV of any kind for his (any!?) purpose, with Congress looking the otherway!
        Only when QE stops, completely and he raises the rate ‘meaningfully, there is a chance, but I won’t count on it, since no one cares for the fundamentals(aka Free Mkt Capitalism), just pumping the bubble, by whatever means necessary!

        • sunny129 says:

          meant March ’20!

        • VintageVNvet says:

          Agree with you s10, except for the ”congress looking the other way part.”
          Congress people are allowed to insider trade as much as they please, and are constantly doing so.
          That’s one of the ways they all become gazillionaires IN OFFICE,,,

    • Swamp Creature says:

      I heard it was over a million in call options on Apple. She also has something to say about the breaking up of big tech. Conflict of interest anyone?

    • Swamp Creature says:

      What about Tesla building its assembly plants in China, while rich consumers in the US get a big tax credit for buying their EV. And I heard they are setting up car dealerships in the areas where massive human rights abuses are occurring?

  51. NotMe says:

    There is nothing to support the value of the dollar now except bank interest. In the past the dollar was supported by being the petro dollar after the gold price support blew up.

    So driiving to 0 carbon is directed at eliminating any payment deficit due to carbon importation. The problem is that during this adjustment, the carbon costs accelerate, driving the dollar down and carbon costs up, leaving the deficit unchanged, and stalling the converstion to 0 carbon.

    Carbon is transportable and storable energy like none other. Electricity cannot be transported long distance and across oceans, and it cannot be stored with substantial capacity, and it costs a lot to lay wire.

    The economy should be based on industry and agriculture. All the other sectors such as government, education and healthcare cannot be traded to other countries for goods. Admittedly it is hard to quantify the value of tradable computer software and services. Oddly enough the US tried to export government. Don’t know if we got anything back for it.

    So where are we headed. Repudiation of the dollar as a trading store. Basically the problem is when it fluctuates, it is hard to calculate borrowing costs and lending income. This same problem afflicts the eCoins for doing real commerce, not criminal activity or tax avoidance. Overnight lending costs are essential to commerce and if they fluctuate significantly, commerce crashes.

    • nick kelly says:

      ‘Repudiation of the dollar as a trading store.’

      Replaced by what? The euro currently #2 has its own
      problems. If anyone thinks yuan check latest on Evergrande. They are done and it’s not just them. As one report put it: ‘everyone made the same bet, they bet on property’. Xi’s sudden puritanism is a way of distancing himself and the CCP from the debacle, when in fact they are in it up to their necks. The idea that one industry came to accumulate these massive debts without CCP compliance is absurd. Selling land for development is how local govt has been funding itself.

      The yen? We keep hearing we don’t want to end up like Japan. Yet with all that debt the yen is very strong and considered a safe haven currency. Maybe having a stable society helps, along with Toyota just now overtaking GM in US.

      • NotMe says:

        The Yuan/Renminbi.

        China has enough trade surplus to steady the price and owns substantial overseas commodity sources.

        Beggars cannot be choosers.

  52. ChrisR says:

    Wolf goes into a bar some day in the future, sees UST certificates plastered on the wall, papering over the cracks. Does he raise a glass?

  53. breamrod says:

    I’m gonna throw a black swan out there for y’all. What would interest rates do if Powell resigns? I have a funny feeling about this and I’ve learned down through the years not to ignore these.

    • Nathan Dumbrowski says:

      He follows AB (NFL reference) and takes off his button down shirt and jacket and throws up the peace sign as he walks out of the Fed. Brilliant!

    • Auld Kodjer says:

      More yellow chicken than black swan

  54. sunny129 says:

    ‘..letting out some of the hot air would be a good thing – and that’s likely what the Fed is gunning for. If it’s big enough, and lasts long enough, it might even tamp down on inflation in future years’

    REALLY?
    Mr. Powell is a confirmed DOVISH, spineless, will cater to whims of Biden and his minions to ‘save’ the midterm elections for Dems. He will talk a LOT, Jawbones to maximum but wil do little to contain the inflation or the assey bubble. Instead he (Fed) REDEFINE the ‘inflation’ number to his liking, with no accountability or challenge by any one!

    Most people will want to tie the double digit earnings growth of 2021 to the performance of the market, but let me dissuade you from that notion. The S&P 500 produced double digit growth in 2019 when there was no earnings growth, it produced double digit growth in 2020 when there was double digit negative earnings growth. The last year $SPX showed a down year was in 2018 when earnings growth was positive. The only discernible constant in influencing market direction has been the US Federal Reserve, not earnings. This directional influence has come with the consequence of ever rising multiple expansion.

    For we all know another truth: Once the Fed capitulates and Powell pivots again markets will bottom and rally again. The Fed will get 3 new Biden appointed members in 2022 and no political party will win the mid terms with markets carpet bombing. As the Fed has already devolved into a political tool by those in power and Powell has already shown himself multiple times to react to political pressure the script is already written: The Fed will switch policy again in 2022 when and if markets drop too much in their eyes. The question is the when and by how much.
    (h/t northmantrader)

    • Old school says:

      To me it seems history teaches us that loose monetary policy tends to spin out of control into a disaster bigger than a central bank can manage. Then there is a lot of carnage to be cleaned up and a lot of upset people looking for someone to be held accountable.

  55. Patrick G Serowka says:

    The fed likes to jawbone/signal but the market knows it is back stopped. However, in suburban Chicago, higher priced areas I see dropping. 20% over next 2 years even w tepid fed response to ongoing inflation.

    I just don’t see fed allowing real attrition of their balance sheet or, if they try, the tanking of things will bring back the punch bowl but the home equity finance machine will stop & the ancillary industries dependent on further housing consumption will get hit pretty hard.

  56. Finster says:

    “Long-term interest rates cannot move much higher until the Fed ends its QE program, which was designed to repress interest rates.”

    That is the stated intent. Whether it actually works that way is debatable. Longer term interest rates haven’t correlated predictably.

    It’s clear that massive buying pressure exerts upward pressure on bond prices and downward pressure on rates, but other factors exert pressure in the opposite direction. For example when the Fed is buying en masse, the market may anticipate higher inflation and pressure bond prices lower. And vice versa. It’s difficult to predict which force will prevail at any given time, but the Fed’s theory that QE operates by lowering long term rates doesn’t hold up under empirical scrutiny.

  57. R Russell says:

    Your penultimate paragraph sounds relatively optimistic that the FED may be able to pilot the economy to a soft landing. Am I missing your point? Because I cannot find other signs of optimism in your writings.

    • Wolf Richter says:

      A soft landing would be a mild recession. And I think that is possible. But not in 2022. Down the road. In my scenario, as the Fed does these things and long-term rates rise, asset prices will be reset. That will be a big component of de-fueling inflation.

  58. DR says:

    I think that H.L. Mencken made a quote to the effect that elections are an advance auction of the contents of the treasury, but you can probably find the actual quotable comment online somewhere, it’s much more elegant.

  59. DR says:

    “Every election is a sort of advance auction sale of stolen goods.”
    ― H.L. Mencken

    Found online:
    https://www.goodreads.com/author/quotes/7805.H_L_Mencken

  60. JeffD says:

    Something to consider: Real estate sovereign currency prices never collapsed in Zimbabwe. It’s foolish to believe the US can’t/won’t follow the same playbook.

  61. Old school says:

    Real Estate in USA is highly leveraged. I believe anything highly leveraged is subject to collapse.

  62. MingoBingo says:

    So, why is the Fed waiting to raise interest rates when other countries have already done so?

    • Wolf Richter says:

      Because this is the “most reckless Fed ever,” as I call it.

      • Nathan Dumbrowski says:

        Reckless in which way? They have to be trying to accomplish something or else what is their motive…
        a) Enriching the banks
        b) Protecting the Nation
        c) Just be general jerks and fiscally ambivalent regarding the bottom 90%
        d) Cornered and have no good options
        e) Other

    • George says:

      Who in their right minds would raise interest rates when inflation is outpacing APR? Every month inflation chips away at that $29 trillion debt mountain.

  63. BigTex says:

    Wow I really appreciate all you guys great comments discussions and research. I found this site recently and I’ve started following it. With all the FED topics being discussed what is a person to do with their own stock portfolio, 401k accts, savings account and real estate holdings, to try and combat the devaluation of your assets, in the coming future? Should everything be moved to hard assets like real estate and gold will cash be trash? Will there be a good indication in time (market signals, FED behavior, etc..)of when to move these assets if possible? Thanks for the great comments!!

    • George says:

      Tex — There will be no good indication in time, trust me on this. No crystal ball. Most of us won’t know the party’s over until we’re stampeded by the herd on their way to the exits, and by then it’s too late.

      All you can really do is diversify your assets thoroughly. Know what you own and why you own it — write all this down because it’s easy to forget when Jim Cramer’s sobbing live on CNBC and brokerage houses are collapsing.

      And by “diversify” I mean OUTSIDE of markets, too. I have a 401k and a .357 Magnum. I have a fire extinguisher and home insurance, see? I’m not betting on any ONE thing to be the RIGHT thing.

    • Peanut Gallery says:

      Don’t try and time the market.

      Organize your assets into buckets with assigned purposes and time frames. One for retirement, one for this, one for that, etc.

      When those life events occur and you need the money, just sell and take care of that life need. That’s the surefire way you invest and have “enough” money.

  64. sunny129 says:

    Yesterday, I wrote that Fed may resort to RE-DEFINE the inflation to suit their agenda!

    If(?) Dallas Fed had thrier way, this is how future inflation will be after creative definition of ‘their’ inflation

    When the CPI peaked at 14.8% in 1980, this brilliantly constructed “designed to outperform” measure peaked at 8.6%.

    Today the CPI is 6.8%, trimmed mean PCE at 2.8%, and PCE at 5.7%.

    Hopefully nobody takes this seriously, but the Dallas Fed pushes this as an alternative measure every month (h/t Mishtalk)

  65. George says:

    “An extra-special cocktail of three powerful ingredients with no cherry on top awaits us in 2022.”

    LOL — Wolf, I love your writing so darn much!

  66. R Russell says:

    Here’s an article that suggests things may not be the same as in the past. It gives on pause to consider that other economic sectors may also respond in ways we may not be anticipating.

  67. Justsayin says:

    The FED cant stop. There has never been once that we have had a trillion dollar deficit that the FED has not had to buy Treasury’s. Do you really think they can unload $8 trillion bucks of assets off there books? Do you think they can raise rates(which have to be raised as high as inflation to rein in inflation)? It’s all just talk, I’ll believe it when I see it. I heard this same talk for over a decade. The minute they back off and wall street cry babies start crying they slam back on the peddle and buy more assets and pump more money into the system and cut rates right back down. Each time bigger QE than the last. Neither the government or the markets can take the FED reeling in this disaster that they have made.

    • Wolf Richter says:

      Justsayin,

      The Fed won’t unload $8 trillion because that’s mathematically impossible because the assets always cover the liabilities plus some, and there are $2.2 trillion in paper dollars (“currency in circulation”) out there, and they’re a liability on the Fed’s balance sheet, and banks buy them from the Fed by paying for them with Treasury securities and other stuff, which the Fed keeps as assets. Then there are some other assets, including gold, that the Fed will keep.

      But the Fed can unload $4 trillion without breaking a sweat. The first $1.5 trillion will hardly even be noticed; they will just absorb the reverse repos.

      • Justsayin says:

        As i said there has never been once that we ran a trillion dollar deficit the fed hasnt bought treasuries. And with the TGA depleted, the US Treasury will have to go back to selling trillions of dollars in Treasury bonds to cover the deficit. It aint like the government is gonna stop spending money they dont have lol.

        Without Fed intervention, there wouldn’t be enough demand in foreign and domestic markets to absorb all of the bonds the US Treasury needs to sell.

        The Fed has been the biggest buyer of Treasuries it cant stop buying them.

        Who is gonna buy these treasuries if not the Fed? So just how is it there gonna stop? There not. They can back off of MBS but not treasuries. And raising interest rates will bankrupt the government. The Fed is trapped. We are already paying over a half trillion in interest now with these low rates. I still dont see it happening but ill be back in a couple months and admit im wrong if they stop. Will you admit your wrong if they dont?

        • Wolf Richter says:

          Justsayin,

          “Who is gonna buy these treasuries if not the Fed?”

          Yield solves all demand problems. 10-year US Treasuries yielding 5%? Investors will jostle for position to buy them. And after all those investors bought, and then the yield might rise to 5.5% before a new mass of investors will jostle for position to buy them. If the yield is right, I will load up on them.

          Junk bonds are yielding 3.5% now… meaning investors jostle for position to by JUNK bonds at 3.5%. So right now, Treasury yields don’t have to go up a lot to find HUGE demand, which prevents the yield to rise further.

          People need to understand that relationship between yield and demand. And the Fed now WANTS long-term yields to rise. That is now official policy.

        • Wolf Richter says:

          Justsayin,

          “As i said there has never been once that we ran a trillion dollar deficit the fed hasnt bought treasuries.”

          That is patently incorrect. Let’s look at the numbers:

          Between Nov 2017 and Aug 2019, the US government sold $2.3 trillion in new debt, increasing its pile of debt from $20.5 trillion in Nov 2017 to $22.8 trillion by Aug 2019.

          During that time, the Fed actually reduced its holdings (quantitative tightening) by $690 billion.

          Between Nov 2014 and Nov 2017, the US debt rose by $2.5 trillion, from $18 billion to $20.5 trillion.

          During that time, the Fed kept its holdings of Treasuries flat, and did not add anything at all.

  68. Swamp Creature says:

    When long term rates go up any significant amount its game over for the real estate bubble. Those small time investors who own more than one home and thought they could play with the big guys will running like scaulded dogs. I see that happening already in some areas of DC. See multifamily condos in not so desirable areas with signs “Price Reduced” .

  69. Turtle says:

    I’ll believe a drop in home prices when I see it. Insanity may finally have become the norm!

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