One of the most important dictums in finance is this: “Don’t fight the Fed.” And this could get ugly (you can also download the WOLF STREET REPORT wherever you get your podcasts).
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Wolf, I wanted to ask. Are we wrong? Has the FED given up on rate hikes and we are doomed to the hellfire of inflation? Furthermore can you elaborate on do interest rated have to be higher than inflation to stop inflation from accelerating?
Thanks.
Listen to the podcast. I’m not repeating it here in the comments.
Wolf,
why do banks lend 30-year fixed mortgages at 5% when inflation is 9%? Is it because holding on to their cash is even worse? Or does it have to do with collateral or something?
Clearly not an economist here
Why does the bank care what inflation is? They’re not holding most mortgages, they just package and sell them onto investors. They just need to make a decent profit on the spread between the financing cost and mortgage rate. As for why investors are buying mortgage loans, too much cash and the current market rate is the current market rate. No one can predict how interest rates and inflation will fluctuate over 30 years.
andy,
Banks originate loans and sell most of them (MBS). They get fees for doing it.
In terms of the mortgages they do keep on their balance sheet: What else are they going to put money into and make more than 5% without taking on big risks? What else is any lender/yield investor going to put money into when interest rate repression is still the rule? There are no save high-yielding choices. Treasuries top out at 3% at the moment. Where are you going to get 5% without taking on big risks? This is the environment we live in. Banks HAVE to lend. That’s the core of their business. They can reduce lending a little, but they can’t shut down the core of their business just because market rates are too low. They HAVE to play if they want to stay in business.
Cost of funds and spreads along with borrower credit quality are variables for bank lending, not inflation. Inflation impacts operating expenses which is managed by the budget process.
Great article Wolf.
I am trying to look into more possibilities for why the market may be fighting the Fed:
1. With the new $700 Billion spending bill, markets may be sensing that political will to fight inflation may be evaporating.
2. Unlike Volker Era, now assets are in bubble due to huge Fed balance sheet, so inflation only hurts people who don’t hold big assets. So, could it be that there is expected reversal on tightening after elections.
3. Only the test of fire makes steel. So far with high employment, Powell hasn’t been tested like Volker, and markets may feel that Powell lacks the spine for this.
@andy,
To add to what others have said, GSEs and Federal reserve suppress the true cost of mortgages.
In a sane and free world, lenders would have charged way higher.
But in our centrally planned economy, GSEs finance most of the mortgages at artificially low rates. GSEs package up these mortgages and sell in the open market.
In a free market, buyers would not purchase these low yielding securities.
Worry not, Papa Fed to the rescue. Fed currently owns more than 1.7T in mortgage backed securities. (One fifth of all residential mortgage if I remember correctly).
What a sham. End the Fed.
1. Classic Banking intermediation. Banks borrow short, and also use your cash in the bank on which they pay you zip, and lend that money long, mortgages term loans, etc.
2. 9% (or 18%) over the long term, compounded, means hyperinflation, so the bank is gambling that 5% over 30 years is a realistic, good long term return.
LTGDFP.
In todays government world what are people more concerned with doing their jobs to the best of their abilities are doing anything they can to keep their big government job? We saw how Powell was intimidated by Trump as you said yourself. We will also see that if things are not as the boss wants them come midterm elections things will turn against Powell once again.
I have traded for what was, at that time, two of the best known and largest hedge funds. I specialized in the futures/derivatives markets which are the largest casinos in the world. I am now almost 80 and you can imagine quite knowledgeable of how Wall Street operates. I eventually set up my own IB for 13 years before Jon Corzine criminally collapsed my clearing firm, MF Global. I mention all this so that you know who is emailing you.
Your weekend report hit the nail on the head, as usual. It begs the question how and why then is the market seemingly gullible , i.e. believing the scripted scenario pushed by the TV financial talking heads, and refusing to do what it is suppose to do. The answer is that there are 3 to 4 big banks, e.g. JP Morgan, and roughly 3 hedge funds that can literally push the markets in any direction for 1 to 6 weeks, using the leverage of the futures and derivatives markets. They are in the business ( according to their own statements ) to make money in any way possible. Therefore, the plan is to swing as many retail traders ( there are millions of them ) and other not so sophisticated institutions, stopped out of their bearish bets and get them to go long. What better set up can you have than this at the present since all logical arguments would favor a short position and certainly not a net long balance sheet. So incredibly, as we have seen since the recent lows just above 3600 on the SPX, the market violently shoots up on the flimsiest of scenarios , as you pointed out. So once most traders are stopped out of their short positions, every effort must be made to get them to go long. They are masters in determining the time when the emotions and mentality of the market is such, that even the most ardent bear is rethinking his position and those who swore that they would undertake some protection, if the market ever rallied, are emotionally unable to do so. That’s when the trap is set and the market is ready to reverse and VERY BIG PROFITS ARE TO BE MADE.
I might add that they ( the manipulators ) are helped by the probability, for the sophisticated traders, that the market is correcting the move from the January high of 4818.62 to the recent July low of 3636.87. The 50% retracement is at 4227 and we saw a high this past Friday of 4140. If one stayed short during this rally, they are ready to check themselves into a hospital. So it is my opinion, that the powers that be can swing the markets violently in one direction or the other, and profit hugely as you can imagine. This is how they can report billions in trading profits.
Love what you write & you are a great help to the investing community.
All the Best,
Michel
TOTALLY agree M…
AND exactly why this old boy got OUT of the SMs in the mid 1980s, when sunny apparently got into that mkt…
SO much and SO major MANIPULATIONS,,, as Wolf and SO many commenters on WolfStreet.com have testified.
Thank you,,, and Wolf.
Buffet running a very conservative book with $147 billion in cash. Means stock market is still too optimistic imo.
Great reply. I am not a professional by any stretch, but the part where you’re talking these guys being the masters of understanding emotions seems to be 100% true. Simply put, there is no good reason for this bear market rally — none. Inflation is raging, the Fed is not done tightening either through the FFR or by reducing its balance sheet, housing is beginning to come down and stock valuations are still extremely high.
They make the shorts go insane to the point where they go long, and once they go long the big boys then pound the market down. The vicious bear market rally during the last half of March this year taught me to approach each day as something new. Sometimes it’s calls, sometimes it’s puts, but I rarely if ever hold anything substantial overnight. I know the overall direction of the market is down.
The minimum decline from the peak will be around 33%, but I definitely think a dotcom repeat is possible. But, again, that doesn’t mean there won’t be at least a couple more dead cat bounces along the way.
John Corzine net worth 2022 $350-400 million. I wonder why being chief executive of this firm as it went belly up did him personally no harm.?
Wouldn’t another way to look at this anomaly be to realize the now insanely ridiculous division of rich and poor (from decades, if not centuries, of ongoing unilateral class warfare) and then ask who is supporting the markets at these levels?
Maybe time for another Net Wealth separation chart?
Total Private USA NET WEALTH just hit $150 TRILLION. (and that’s just the stuff the Fed knows about, or maybe wants to)
Surely it figures in somewhere in the big scheme of things?
I look at it as a battle between Corporations (totally legalized theft, with more new law for achieving it more easily every day) and Sovereign States….so did Abe Lincoln….and I bet he figured the corps would eventually win, but he did warn us and hoped for this Democracy experiment (such as it was/is) to win out somehow……so do I.
Maybe I should get a St Jude statue for my dash, rather that the pawn I have now.
dammit, NBay, ‘pawn on the dash’ made me spray my coffee (perspicacious, as always you are…). now, will have to get me one…
may we all find a better day.
What kind of neanderthal would conclude that the FED has given up on rate hikes after the last FED meeting?
As people keep pointing out, each meeting their forecast has been insufficient to reflect the level of actual inflation, and their tightening has been accelerated.
Even if things are turning, they’ve yet to go a meeting cycle where they were right, and not be caught out and have to over-tighten.
At that point you might start to see light at the end of the tunnel.
Right now this is a big freight train at record speeds. Even if they start to stop accelerating it, that’s not bullish for stocks.
For now their language and response has been pretty consistent.
To see dovishness here requires some special kind of interpretation of Fed’s behaviour.
It’s one thing to recognize that the FED Is horrifically behind the curve, but quite another to say that they’ve “given up on rate hikes” after they just hiked 75 basis points in the last two meetings, while stating 75 basis points was on the table for the September meeting.
In my opinion, where the FED has failed was saying “on the table.” They should have told the market that 75 basis points was guaranteed for September, that a larger rate hike was not out of the question, and that an emergency hike in August was also “on the table.” Instead, they keep soft-peddling their aggressiveness.
The FED’s language is to continue to leave hope for the markets, and that’s where they are abject failures. They haven’t talked tough enough, and it’s coming back to haunt them. That’s why Yellow Powell needs to go. They need a new, tougher person as the figurehead. He’s a flimflam man.
DC
Agree
The Fed is pussy footing, feet dragging, and their lack of effort initially is very telling.
I suspect deceit, intentional laggeredness.
On the other hand, stock bears have little to look forward to…
no Fed meeting in Aug
declining YOY inflation readings
The politicians are spending hand over fist with rates still….STILL a record disparity to inflation.
We will see if the balance sheet dropped in any meaningful fashion tomorrow
QT?
historicus,
“…see if the balance sheet dropped in any meaningful fashion tomorrow QT?”
1. There is no balance sheet “tomorrow” (Monday). The next one will come out on Thursday, with balances as of Wednesday evening. Same as every week.
2. I can already tell you what Treasuries rolled off because I can look that up by maturity date in the maturity schedule, which you can download from the Fed. I also can tell you by how much “amortized premiums” declined. MBS are unpredictable, and we’ll have to wait and see.
At the mid-month roll-off, $12 billion in TIPS rolled off, as I pointed out they would a week earlier, on July 7, when I said this: “No TIPS matured in June. But next week, July 15, TIPS with an original face value of $9.6 billion plus $2.5 billion in inflation compensation will mature, for a total of $12.1 billion” — and that’s exactly what happened on the balance sheet that included July 15.
All you have to do is look at the maturity schedule, and you can see what Treasuries are coming off mid-month or end of month.
https://wolfstreet.com/2022/07/07/feds-qt-kicks-off-total-assets-drop-by-74-billion-from-peak-new-era-begins/
Two weeks ago, mortgage rate was 5.625%, now they are saying we can lock in at 4.725% for 30yr.
As somebody forced to relocate cross-country, I’m grateful for the drop.
Depth Charge, pretty much nobody has concluded that the Fed has given up on rate hikes, but lots of people are betting that they will in the not-too-distant future. Bond markets certainly seem to be signaling that high inflation won’t be a long term thing even after the Fed stopped buying bonds. Just last month, Powell said in plain English that he wants to return to low mortgage rates accompanying low inflation, and his Trump-era U-turn was disastrous for his credibility. It’s clear that he prefers to be in a low interest rate environment if given the choice. He also hinted that the Fed could take a breather later this year and allow a little time for their current hikes to sink in. He talks hard out of one side of his mouth while planting little nuggets of hope for tightening deniers out the other. So if one is of the mind that inflation is near its peak going into a recession with house prices slowing down and supply chain bottlenecks loosening, then betting on a Fed that will moderate its rate hikes or even ease up is a rational decision. Maybe not accurate, but rational.
“So if one is of the mind that inflation is near its peak going into a recession with house prices slowing down and supply chain bottlenecks loosening, then betting on a Fed that will moderate its rate hikes or even ease up is a rational decision. Maybe not accurate, but rational.”
Truflation has inflation at 10.10% this morning, up from 9.9% last Friday. Most of the increase coming from Food & Utilities. If inflation at it’s peak? I guess you could say yes because the YTD range is from 9.67 to 11.29%.
The issue the deniers will have is what is the Fed to do if rates don’t go down any time soon? Another 5 bases points in Sept. ain’t going to do it IMHO.
“Powell said in plain English that he wants to return to low mortgage rates”
I don’t think he actually said that in English or any language.
Cytotoxic,
Jerome Powell 6/15/22: “We need to get back to a place where supply and demand are back together. And where inflation is down low again and mortgage rates are low again.”
Maybe he wants low interest rates, but his hands are tied? Or maybe it was just double-speak to calm markets? We’ll know in time, but he said plainly that his goals are low inflation and low interest rates again. Those goals are seemingly at odds, so which one will win? Place your bets!
It was a bad idea for the FED to destroy its credibility.
The Fed controls money, and by extension, you. It doesn’t need credibility. It doesn’t need obedience either.
“Whoever controls the volume of money in our country is absolute master of all industry and commerce … and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”
James Garfield
Hence bitcoin.
The parable of the monkeys was lost on you.
Unless that’s your business model.
Tulip mania, without the tulips.
My shoe shine boy gave me a tip about Bitcoin. Maybe I’ll look into it.
You can grow tulips with water and sun and influence supply. Bitcoin is money tied to energy. It takes around 10k to mine a Bitcoin. There will always be less than 21m Bitcoin as many get lost. Tulips are dissimilar and only hasten your understanding of something that is swallowing fiat. You can move large amounts of value around the world for pennies today with BTC without permission and nobody can stop you. It’s like you are betting against the internet in 1995. They tried to create digital money along with the internet. But nobody could solve the double spend problem. Bitcoin solved it and now we have incorruptible digital money. It does have some strange characteristics. But tends to go up. 107m people hold Bitcoin and we are early in s curve adoption.
“ Hence bitcoin.”
Hence the phrase…
“Yew bes wants fries wid dat”
The bitcoin crowd tends to miss the part about them being the ‘absolute master of industry and commerce’.
Thus no bitcoin.
Laughable response, at best.
Reliable, strong money based on algos?
R I G H T !
Someone didn’t like Garfield for that kind of talk. Another ‘lone nut’ like Lee Harvey Oswald.
Una,
You don’t have to believe in BitCoin to see that 20 years of ZIRP ruined blind faith in the dollar.
From here on out, dollar/fiat alternatives will never stop coming.
Sooner or later someone will come up with the right combination of safeguards/characteristics, along with non-dilution being built in.
When that happens, all hell will break loose.
Even more than the military, the dollar is the rotting prop that holds up shakey US stability.
Once DC can’t freely print to manipulate mkts/buy factions off, the wheels will come off pretty fast because the underlying fundamentals are ugly and have been for 50 years.
@Duke. You said 107 million hold bitcoin but their is only 21 million bitcoin. That seems impossible?
LOL
There was no Tulip Bubble. It’s all myth-making.
Bitcoin is bad money, crypto is essential to delivering good money.
My understanding is that Bitcoin has failed in its intended role as means of payment, due to very small number of transactions that Bitcoin peer-to-peer network can process. If I recall correctly, Bitcoin network maxes out at few dozen transactions per second (vs tens of thousands for VISA or Mastercard each). There are proposals to speed up processing of Bitcoin transactions by introducing intermediaries (businesses), but this is obviously unacceptable to many Bitcoiners because it creates a chokepoint that hostile government can exploit. While I like the idea of peer-to-peer cryptocurrency very much, I don’t think Bitcoin is a good implementation of this idea. What is needed is a technological breakthrough that will speed up cryptographic processing by at least 2 orders of magnitude (100 times). This would allow peer-to-peer network to scale up and gain critical mass.
@Ru82
> @Duke. You said 107 million hold bitcoin but their is only 21 million bitcoin. That seems impossible? LOL
The average bitcoin holder owns less than one bitcoin.
Money supply does need to be regulated, like water supply, electricity supply, blood pressure, blood oxygen supply. Impairing one regulator does not mean there will be better regulators/regulation in its place.
Crypto has stumbled very hard on this fact of life. The “trustless” medium turned out to be an impenetrable swamp of untrustworthiness, opacity and shell-games. As always, the chiselers showed up in short order. I’m not just a doubter, I have studied DEFI in depth. the hidden traps there are beyond count.
But the psychological desire for magical novelty escape is constant. A sucker is born every minute.
Duke, ya gonna lose it all, crypto is worth ZERO. I won’t waste any time explaining how everything ya say is just propaganda you probably picked up from pumpers.
Digital money already exists & with electricity exploding in price Bitcoin scamming costs are skyrocketing. Crypto people are cultists & delusional.
You say people lose their crypto like it’s a good thing, 2 years ago mining 1 Bitcoin supposedly cost 16k, now it’s 10k? costs tripled.
One last thing Duke, without banks ya can’t use Bitcoin, so it’s easy to stop you, people already have their bank accounts blocked & closed, cash is far better for privacy.
Everything ya say is nonsense, just propaganda, you need insolvent unregulated platforms to buy & you need banks to liquidate, in fact crypto is a huge target on ya back, it’s not private at all, if I drive a car 300 miles using a tank of fuel costing $100 does that make the car worth more or less. Linked to energy, that’s totally absurd.
Crypto like antisocial media is the height of stupidity.
But Matt Damon told me Fortune favors the brave..I get reminded of that everytime I walk by LA Live..what a joke..
In this day and age we live in Fortune favors the con artists and shills..and for that we sure are living in the golden age.
Crypto worked out great for the people who understood what it was fundamentally and got out with the money of fools before the grift fell apart.
A sucker is mined every minute.
“crypto is worth ZERO”
Objectively false. Nothing else delivers the seamless payments for ultra-low fees that crypto can. Nothing else is gonna give us permissionless good money.
“I won’t waste any time explaining how everything ya say is just propaganda”
Yeah, you do that. You double down on that counter-contrary tedium. I’ll buy some crypto in the nearish future at low prices after its version of the dotcom bust.
Did you listen to the podcast? It discusses how markets are fighting the FED. Why would markets fight a FED that has credibility? Particularly when, as you say, the FED controls money, and by extension, me, you and the markets themselves. I guess the markets didn’t get the memo from President Garfield.
Sure the FED will eventually win if it chooses to stay the course regardless of its credibility, but the markets wouldn’t fight the FED if it didn’t lack credibility.
rojogrande
“but the markets wouldn’t fight the FED if it didn’t lack credibility’
SPOT ON!
The Fed’s lack of credibility ( since ’09) is under appreciated, in the world of rational thinking. Right now, the perception is winning over the reality for the last 2-3 weeks.
Mr. Powell lacks the spine and required integrity, unlike those od Mr. Volcker!
Re “Why would markets fight a FED that has credibility?”
Two reasons:
First, the QT is too weak for the rate hikes, which themselves are pathetic relative to the inflation. Too many speculators have loose “cash” desperate to beat inflation. (Make a historical scattergram of monetary base vs. interest rates, a la Hussman, and ye shall see a Great Powell Anomaly.)
Second, the Big Boys still need time to exit and/or hedge their positions before the real crash, and so they’re ginning up media hype to sucker the little guys in one more time. The notion that the bond market is predictive of future Fed policy rate changes is totally laughable and completely at odds with the most-relevant data (from the 1970s). But people want to believe…
Bonus: I have no idea how long the market will fight the Fed, but I’d be looking for things to change no later than mid-October as the election outcomes firm up and expected policy changes start to get priced in.
P.S. For those moaning about how there’s no Fed FOMC meeting for 2 more months – notice that the annual J-Hole Fed/Econ confab is in late August, and moves markets much like an FOMC meeting.
“Why would markets fight a FED that has credibility? ”
Markets fought Federal Reserve in 2018, and won (with help from US president). They hope to win this time too. Personally I wouldn’t bet on their victory.
No, in 2018 markets were NOT fighting the Fed. They were doing what the Fed wanted them to: stocks were down 20% by Dec., yields were spiking, 10-year yield hit 3.2% in early Nov, Treasury yields were above CPI across the board, mortgage rates hit 5% in Nov, even as inflation was BELOW the Fed’s target. Markets were doing exactly what the Fed wanted them to do: they were tightening financial conditions.
But market crybabies were crying about those tightening financial conditions, and Trump was crying about them, etc.
You are so right!
Sunny 129 volker was Reageas puppet least u forget who was running the ship
unamused,
Cause and effect? We will never know, but two weeks after President Garfield made that statement in 1881, he was assassinated.
“The Fed controls money, and by extension, you.” That is a concise and true statement.
But here is another true statement: “The Two Party Duopoly of the United States Congress gave the Fed immortality in 1927. And Congress, which is the power-center of the TPD, continues to let the Fed maintain control over you; nearly one century later.”
Don’t fight the Fed? Only one real alternative to regaining control of the dollar exists, but that needs a Congress that’s not part of the TPD. For those who dislike the Libertarian philosophy, keep voting for Team Red or Team Blue. Keep having the Fed controlling you, by extension of how you vote.
“‘The Fed controls money, and by extension, you.’ That is a concise and true statement.”
The statement is not exactly true. A more accurate statement is: “The Fed controls money, and by extension, your money.” The Fed’s “control” is limited by the extent to which an individual is dependent on money. This differs from individual to individual and even then only applies to the economic aspects of a person’s life. Although the Fed didn’t exist in 1881, even if it did it wouldn’t have been able to control Garfield’s assassin.
rojogrande,
Yes, two good points.
First,
The control of my life is my own. But the Fed does exercise much control over the economy; and thereby the lives of citizens in that economy.
“The most reckless Fed ever!” -Wolf Richter
On Friday, 15 July 2022, Charles Hugh Smith stated:
“The illusion that the global economy could effortlessly add trillions in debt to fund living large forever was based on a brief historical anomaly of zero interest rates enabled by low inflation. There’s a long lag between the vast expansion of debt/consumption and the eventual consequences on supply, demand, risk and price discovery.”
I agree with that statement.
The consequences that are hitting, and will hit millions of Americans from the rampant inflation now happening, is the direct result of the Fed’s abuse of power.
Second,
A year before he was assassinated, President Lincoln stated:
“I have two great enemies, the Southern Army in front of me, and the financial institutions in the rear. Of the two, the one in the rear is my greatest foe.”
On 30 January 1835, an assassination attempt against President Jackson did not succeed. He would soon publicly claim that the Rothschild’s banking cartel was behind the attempt.
Under Jackson’s lead, the charter for the second “Fed” was not renewed by Congress in 1836. Prior to that, in 1811, the first “Fed” charter was not renewed by Congress.
In 1927, Congress made sure a non-renewal could never have the chance to happen again with the passage of the McFadden Act. So, here we are with the Federal Reserve System at the helm.
Rojo,
I get what you are saying, but controlling the economic aspects of someone’s life will exert a high degree of overall control for a large majority of people.
And that is all you need in a “democracy”.
In many ways, the power over money supply achieves a level of personalized, atomistic control (silently) that most totalitarians failed to achieve through violence and fear.
Manipulating human behaviours via the carrot (ZIRP) rather than the stick (KGB) tends to work “better” because fewer people feel explicitly victimized, and the prime actor works behind a veil.
Dan,
Interesting, thanks. I agree with your observation of the TPD and the statement by CHS. The United States has certainly had a tumultuous history with its banks.
Eurodollars are the real threat to the system. Nearly all financial crisis from 71 onwards have their roots in the Eurodollar. Do we know of any other country on earth which allows a foreign entity to lend its currency into circulation? It’s totally out of the control and jurisdiction of United States. Probably by design.
In a system that boasts of “checks and balances”, who checks the Fed.
And “ It is absurd to put important decision making in the hands of those who pay no price for being wrong.” T Sowell
“In a system that boasts of “checks and balances”, who checks the Fed.”
Inflation ?
NC is still running commercials trying to hand out $30,000 to small business because the $5 T of Fed govt funds haven’t been fully dispersed. Plus student loans not being paid. Plus congress still deficit spending. All while inflation is running 9% with more to come.
They are just going to do what they did last time. They will fight the Fed to the end. History always repeats, due to the same underlying factors, both social and technical.
PS an intermeeting hike of 0.25% within the next few weeks would save a lot of people a lot of pain down the road. That little extra swat on the hiney for misbehaving would have the shock value needed to get people to fall in line.
Good idea. You should be running the FED, not Powell.
Regardless of the amount of the hike, letting 60 days go by in this environment is pretty asinine.
It isn’t like the Fed Governors are worn out from digging ditches all year and need a month in the sun to recuperate.
In a 7/24 world of financial mkts, 60 days of non responsiveness is just…stupid.
And a “surprise” interim meeting would just be pointlessly disruptive.
These mooks should have just set an August date months ago.
@Cas127
Should have been raising rates 50-100 basis points last September, then we would be at 5 or 6 % by now.
Stocks in 401k accts and in Robinhood bought with stimulus money are not for sale. I think that’s not going to help. Folks generally don’t actively manage their retirement. Sometimes I wonder if the whole 401k program was intended as a sinister ballast to the markets.
Totally agree with this. I am not an active or smart investor by any means… It’s hard for me to wrap my mind around all the different kinds of investments and what they do. But in January I moved all my money in my 401k from stocks to stable value bonds. Now my portfolio only goes up a few dollars every day, but I’m avoiding the big drops. Avoiding any big gains, too, and this probably isn’t the best way to make money in my 401k, but I feel much more comfortable in the short term. Everyone thought I was crazy. They still think I’m crazy when I say it has a lot more to fall. Oh well…
Careful. Bond values change with interest rates. If interest rates are going up, bond values will drop to compensate. True, if you hold a bond to maturity, you’ll get back your principal. But you’ll get ravaged by inflation while you hold it.
He/she has stable value funds. While NAV is not $1, like in a money market fund, they still are very stable, hense the name. Of course there is no gurantee they will not go down, just like a money market could break a buck. There is no cash in 401K, unless you have brokerage option and put cash there (I think).
Hardigatti
” If interest rates are going up, bond values will drop to compensate”
That’s true, most of the times. The rate went up from 0.25 to 2.25% currently, right
Just look at High grade Corp bonds -LQD since ‘LAST 30’ days, the yield is just over 4% but the value also went up. So are the high yield HYG (yield over 7%) JNK (yield over 7%) and also up in value.
Why? Investors think(!?) Fed will pivot soon before the end of the year, whether true or not. It is the perception over the reality!
Of course this could change next week. But Traders with nimble hands have made money.
B/c this a TRADERS” mkt and NOT the investors.
Sunny,
JNK is down 12% year to date, even with recent 6% rebound.
401K bond funds were down 8-12% this year, which means most interest they paid since 2016-18 got wiped out.
Which means there is nowhere to hide this time. Got puts?
Hardigatti
I should add that I was also thinking ‘logically and rationally’ and bought some puts on LQD,HYG AND JNK and 1 or 2 long leap calls on the same. During the last weeks, I had to close/sell my puts and kept my long calls keep going up.
Not many know, how to trade options, especially in a volatile mkts like these. It is all about ‘timing and trend’ and need to be flexible Been in the mkt since ’82, gone thru more than 1 Bear.
Most retail investors will end up holding bag, just like in all Bear mkts.
Again my emphasize is this TRADERS’ mkt and NOT investors. The strategy and investing/trading are entirely different.
andy
Yes I have/had puts. See my reply (2) to Hardigatti below.
There is the difference between trading vs investing.
When one buys (timing) is more important during option trading than during ‘conventional investing. It is timing and the trend determines the profit or the loss. Hence some hedges in the opposite direction. Possible only nimble traders in an IRA acct.
Sunny,
IRA is good account for this. I also diversify into reg account, just in case.
Posted this earlier: You may be able to transfer your current 401K balance into a brokerage account, and then buy short term CDs, Treasuries or just hold as cash if you want to avoid being forced into the market. Some 401K managers allow transfers without jeopardizing continuing contributions or matches from the employer.
With Interest rates for retail borrowers going up.while interest rates for the big guys are falling .10yr bonds falling from 3.5% down to 2.6% someone with unlimited pockets has to be buying the debt.who would buy debt at 2.6% when inflation is at 9.1% that is BS They are trying hard to fuel inflation at the expense of retail borrowers .All this unlimited money printing to suppress the 10yr bonds down to 2.6% is total FED inflation fighting BS .
The benchmark 10 year US Treasury yield is the most important indicator to watch as well as being the most accurate as this what most important interest rates including all mortgage rates are based on. The US Treasury markets are the largest bond markets in the world and it is apparent that large investors are now better on a substantial recession by pushing yields lower in the US Treasuries markets.
Yes, they’re valiantly fighting the Fed.
Lets all remember when speaking of yield curves and interest rates beyond ten years, that the Fed has sopped up massive supplies of long maturities….they own, hidden from the market, circa 35% of all Treasuries ten yrs to 30yrs.
They also have hidden from the market 2.7 Trillion of long maturity MBSs.
So when people look at the yield curve and Refer to any inversions as historical proof of something, lets remember the balance sheet isnt 800 billion anymore, but circa 9 Trillion.
And it is a matter of public record courtesy of former Fed governor Fisher that the Fed intentionally pounds down long rates in order to force investors to take more risk.
The yield curve looks just like the Fed paints it
Wolf
What do you think on Bill’s supply? Treasury aims to limit Bill’s supply?
Sincerely
I would too, with an inverted yield curve, where it’s more expensive for the Treasury to borrow short-term (2.9% for 6 months and nearly 3% for 1 year) than long-term (2.67% for 10 years). They might as well lock in the lower long-term interest rates. Bills have to be refinanced when the mature, and six months from now, short-term yields will be far higher.
Fighting yesterdays battles?
“The crisis now unfolding, however, is entirely different to the 1970s in one crucial respect… The 1970s crisis was largely artificial. When all is said and done, the oil shock was nothing more than the emerging OPEC cartel asserting its newfound leverage following the peak of continental US oil production. There was no shortage of oil any more than the three-day-week had been caused by coal shortages. What they did, perhaps, give us a glimpse of was what might happen in the event that our economies depleted our fossil fuel reserves before we had found a more versatile and energy-dense alternative. . . . That system has been on the life-support of quantitative easing and near zero interest rates ever since. Indeed, so perilous a state has the system been in since 2008, it was essential that the people who claim to be our leaders avoid doing anything so foolish as to lockdown the economy or launch an undeclared economic war on one of the world’s biggest commodity exporters . . .
And this is why the crisis we are beginning to experience will make the 1970s look like a golden age of peace and tranquility. . . . The sad reality though, is that our leaders – at least within the western empire – have bought into a vision of the future which cannot work without some new and yet-to-be-discovered high-density energy source (which rules out all of the so-called green technologies whose main purpose is to concentrate relatively weak and diffuse energy sources). . . . Even as we struggle to reimagine the 1970s in an attempt to understand the current situation, the only people on Earth today who can even begin to imagine the economic and social horrors that await western populations are the survivors of the 1980s famine in Ethiopia, the hyperinflation in 1990s Zimbabwe, or, ironically, the Russians who survived the collapse of the Soviet Union.”
“..without some new and yet-to-be-discovered high-density energy source”
E=mc^2. Hello.
“As winter approaches, the outlook in France is increasingly dire. Electricite de France SA, the state-owned utility, is running only 26 of its 57 reactors, with more than half of its chain undergoing emergency maintenance after the discovery of cracked pipes.”
“Although the French economy is smaller than Germany’s, Gallic power demand surges well above that of its neighbor during the winter as households there rely more on electricity for heating and hot water.”
“France has been importing electricity, on a net basis, by a growing number of days per year as its nuclear fleet couldn’t deliver enough electricity.”
So their maintenance is lacking and their designs not robust. Not a knock on nuclear power. Think of all the CO2 not spewed into the atmosphere.
26 reactors, roughly 50% of all reactors, simultaneously developed “cracked pipes”. Sounds plausible.
Jeff D,
Age. When these pipes get old, they crack. California shut down one of its two nuclear power plants (San Onofre) because of cracked tubes. There was a small radioactive steam leak, and when they checked they found hundreds of these tubes had cracked. To replace all these tubes would have been too expensive for an old power plant. San Onofre started operating in 1967. A lot of power plants are facing this issue as they get old.
The first nuclear power plants in France started operating in the 1960s, and there was big push in the 1970s, which is the generation of a lot France’s nuclear power plants today.
They should have let faucets drip when it’s freezing.
Don’t know how old these reactors are. Don’t know where these cracked pipes are so I can’t judge the technical or financial risk and neither can you. Call it a design deficiency requiring a retrofit or more active maintenance and repair. Nuclear power — still the Earth’s most important friend.
The absolute maximum time between maintenance audits at a nuclear plant is 24 months, and much more frequently than that for some subsystems/structures. The question remains, why now, and why all at once?
Fusion is always 5-10 years away, and no western government is supporting fission. And if they did the reactors would be ten years out.
There are nuclear plants now. Technology existed since before I was born.
What does the stupidity of western goverments have to do with “new and yet-to-be-discovered high-density energy source”?
as is “brilliant light power” :)
> The 1970s crisis was largely artificial
The current crises are also remarkably artificial. The central bank gypsies grasp to suppress the eventuality of true price discovery however is not.
It ain’t magic but Toyota came up with hybrid tech in 1999 that got cars to 45 mpg.
It is only wilful stupidity that kept the mkt in 15 mpg SUVs for the next 20 yrs.
Again, not a miracle, but a tripling of US fleet mpg using long existing technology, would be a significant help.
Disagree entirely. You got a source for that quote? Were they alive in the 1970s?
From my research: The real 1970s crisis was an organic outcome of the stock bubble of the time. Read The Go-Go Years and learn about the Nifty 50; study the “Guns and Butter” overspending and political overreach of the unions; and consider the ramifications of the departure from the Gold Standard — and much more — all of which made a crisis inevitable, yet predated the oil shock. The OPEC shenanigans were an unfortunate bonus, the pin that finally hit the bubbles, but the inflationary lost decade for stocks was inevitable regardless.
I get why when the economy is doing fairly well Wall Street wants QE to turbo charge everything. The analogy I have in mind is the economy is a bathtub and by doing QE, the Fed is adding a boatload of water in the tub and a rising tide raises all boats (some more than others). But Wall Street rooting for a recession is like wanting the plug to be removed so the water is draining just so the Fed can pour more water back in the tub. Wouldn’t a recession and layoffs and consumers and companies spending less outweigh the benefit of extra QE?
“ I get why when the economy is doing fairly well Wall Street wants QE to turbo charge everything”
Consider how Wall St makes money…
They produce or create nothing productive…
Higher interest rates create less money churn which creates less fees which reduces Wall St income…
Low interest rates have been a very golden goose for years creating a lot of money churn…
The “market” knows that higher interest rates will have a substantial and long term effect on their fees and income…
If it were me I’d be trying to influence everything I could to keep the game going too…
> They produce or create nothing productive…
Capital is a factor of production, it coordinates production.
Do you think some mythical blue collar worker standing on a street corner can do that?
“Wall Street” coordinates and deploys capital. And charges a fee for it — oh, the shock! Banks and other financial entities gather information about good prospective deployments of capital.
Do you think a bunch of pseudonymous crypto bros from East B-F with tokens who don’t even know each other, can do that? Exhibit A is all their blow-ups.
Hating anything centralized is the great faux phobia of our times.
How does using your profits to buy back your own stock benefit anyone other than top management and yes the big stockholders? That’s not deploying capital towards plant or equipment. It is greedy financial engineering. Often times it doesn’t end well. It used to be illegal. It should be illegal.
“ Capital is a factor of production, it coordinates production.”
Noooo….
It allows production… Wall St does not create anything except fees for the pass through of capital…
Reread what I actually said vs what you thought I said…
The gist was that Wall St in a low rate environment makes a lot of fees that will be reduced in a higher rate environment, resulting in less profits from the churn…
Nothing about how capital is employed or centralized…
I know it’s early in SD…
Good morning !
It’s too bad that Wall Street has deployed so much capital to zombie corporations. Perhaps that’s one of the reasons that Finance’s share of the economy has grown so large in the last 20 to 30 years.
Wall Street needs to be reformed. Specifically, all of the investment banking firms must become general partnerships again, which will deter reckless deals.
Ed C: share buy-backs are not entirely acts of greed for management, although it’s often the case. Buy-backs, in theory, reduce the number of shares outstanding which should elevate the remaining float – lifting the value of all shares. If a company feels their share price is undervalued, enough so that buying their own shares is a worthwhile investment with their available free capital, it makes sense to buy back shares, especially if they anticipate higher earnings.
COWG: You’re reminding me of the claim that video games will corrupt the youth and should only be ones that children can play or that television only airs trash and worthless content. These “products”, as shitty as they are, are the result of market demand. Same with MMA fighting. If the sheeple want more violence, some “enterprising” person will satisfy that need, unless there’s some form or regulation or censorship. The same is true of the thing that everyone on this site demonizes: FINANCIALIZATION. I agree that it’s morphed and metastasized, but no one has to play the game, although they’ll suffer nonetheless. They can put their money under a mattress. Or they can buy vodka. The hedge funds, pension funds, insurance cos., banks, central banks, function due to the concentration of wealth and popular demand. They aren’t creations of conspiracy theories, although conspiracies are morphing and metastasizing faster than the speed of cow patties flung high.
QE became ineffective in 2021. The Fed could restart it tomorrow with limited sustained effect.
The market is at greater liberty to Fight the Fed, or more precisely, make allocation decisions notwithstanding the Fed.
A reason for the fall in longer dated yields might be the anticipation of imploding equity prices in Q4 or sooner and possibly a cascading trend after that. Surely, this is no less plausible than the Fed’s outlook that it can bring inflation back to target, avert recession and maintain an orderly balance through incremental rate hikes and speeches.
QT must progress much further before QE can function again as a crisis-deferral tool, which is all it has ever been. It has never been a remedy.
There is more wisdom in pockets of the market than on the board at the Fed. It’s a statistical certainty and not a derogatory comment. Some of this wisdom or alternative thinking is starting to emerge in the data.
The market majority continues to follow the Fed as evidenced by the S&P 500 at 4,130 and rising.
Who is the greater fool?
AB
“Who is the greater fool?”
The ones who left the table without following ‘ the winning power of perception over the reality’ for the last 2-3 weeks. Mkt may remain more irrational than one remains solvent, under this most dovish Fed merely ‘talking’ hawkish.
When the ACTIONS justify beyond it’s empty rhetoric, I will change. My hedges, of course, are always ‘standing by’ , in this volatile and traders’ mkt.
sunny129
I wasn’t comparing the relative performance of stock bulls and bears over the past three weeks. Irrationality and solvency are also not relevant.
In the context provided (Long Dated Treasury investors v Stock Market investors over a forward timeframe greater than three weeks), stock market investors will be the greater fool.
AB: Which “pockets” in the market represent “wisdom”? Is it because they are under-, fairly-, or over-valued; actively traded or actively ignored? If undervalued, it would suggest that wisdom is a well-kept secret – that is, it’s dark matter.
Why is the I word suddenly so important? The Fed was lulled into a sense of false security. Even Bernanke said he could not understand why inflation had not resulted from QE. For years the presses went brrrr without inflation even stirring. And then whammo and here we are.
The answer perhaps lies in the type of inflation. For over a decade we had major inflation of assets but the CPI was docile. But when covid arrived the Fed took courage from the benign history of QE and (with POTUS leaning over its shoulder as Wolf mentioned) decided to get bigger helicopters and shower the peasantry rather than the gentry. The gentry had always used the windfalls to purchase stable assets such as yachts and estates so the money was quickly locked up. But give it to the peasants and it is immediately gone down the road to buy a sixpack and then on its merry way to the next transient purchase until the velocity of the money moving around reaches an escape level. This is CPI inflation rather than asset inflation.
“The gentry had always used the windfalls to purchase stable assets such as yachts and estates so the money was quickly locked up.But give it to the peasants and it is immediately gone down the road to buy a sixpack and then on its merry way to the next transient purchase…”
How is it that money is locked up when used to buy yachts and estates but not when used to buy consumables such as sixpacks? Do the sellers of yachts and estates hang on to the money? If so why? If they do they’re losing out, obviously.
Medial A the seller of yachts and estates may use the money to buy another yacht or estate. People with this sort of money may be more likely to tie it up rather than spend on consumables. The seller of the 6pack will use it to buy more 6packs, pay sales staff etc the money moves ever on. The more often money moves on (the velocity) the more available it is. The more available money there is for consumers, the more likely are prices for consumable goods to rise. The same rule holds for the investor in speculative assets.
The investor spends on different things to the consumer and the Fed and Congress changed where they were sending the money. They went from investors/banks to consumers/day spenders.
“ How is it that money is locked up when used to buy yachts and estates but not when used to buy consumables such as sixpacks? Do the sellers of yachts and estates hang on to the money? If so why? If they do they’re losing out, obviously.”
ma,
The people at that level buy or sell ( whether it’s yachts, aircraft, or property) based upon tax implication for them…
A $20 million yacht, I guarantee you, has favorable tax benefits when it’s all said and done…
“Why is the I word suddenly so important?”
Malignant narcissism is fashionable these days. It plays on every human’s neurotic need to feel ‘special’ and makes it so much easier to encourage the slaves to learn to love their chains.
There are many examples. Millions of them.
unamused the “I” word I referred to is inflation and I agree completely with your comment
I immediately thought of narcissism too when I first read it, but then realized it was about inflation. Too many YouTube and TikTok videos of people thinking they can become millionaires through React videos on people doing the actual work of content creation, chasing the dopamine and ad revenue that comes with producing high view counts by any means necessary short of sex work.
I’m wondering about the macroeconomic effect of people being encouraged into those kinds of work versus “boring” but important jobs that provide more stable futures, but I did a lot of stupid, short-sighted shit in my 20s too.
Unamused: Is malignant narcissism more “trickle down” – from a POTUS on down for example, or “trickle up”, as in “let’s vote for a billionaire savior who most definitely has MY well-being uppermost in his mind?”
How-to reprise an old SNL skit: “…stop arguing you two, it’s BOTH!
may we all find a better day.
I have been hearing “The Fed’s credibility” thrown around a lot lately. Mainly the fact that if they do indeed pivot soon, bond markets won’t listen and will run away. Could that mean bizarro world where fighting The Fed becomes not fighting The Fed. I think anything’s possible when they think a soft landing can be engineered. Just like when an airliner makes a crash landing. It looks like they are going to make it until one of the wings burst into flames and it’s game over.
“It looks like they are going to make it until one of the wings burst into flames and it’s game over.”
Good analogy.
Fed credibility?
How is it, first, that an entity that exists to promote “stable prices” somehow is allowed to promote ANY inflation?
Secondly, how is it that even accepting 2% as a goal, that when there is 9% spike that the Fed doesnt recalibrate….that there is no talk of roll backs to resume the “planned” trajectory of inflation? They admit these spiked prices in 12 months with a few more % pts tacked on is acceptable and likely victory.
Cheers! Thanks for the clarity.
This time I disagree WOLF. The market is calling the FED’s bluff (rightfully so), as the 10 year yield is crashing lower. They know despite Jay’s tuff talk, he will pause his rate hikes by late 2022/early 2023, declaring a premature victory over inflation. There will be no significant selloff of MBS or any meaningful QT. We will be dealing with 4-6% CPI for years and this will be marketed by the FED and the media as “good/new normal/blame supply chain, covid, etc.” Sad.
Foreigners will not be buying US government debt obligations if USD inflates at 4-6% annual. This will have major negative impact on US government spending (military, social programs etc.). See Wolf’s article that describes drop in USD share in the world reserves in a very inflationary decade of 70s. US government must bring inflation down to a level that foreign investors will be comfortable with. I dont know what this level is, but I doubt that they will be comfortable with 6% inflation (vs 3% yield on Treasuries). The 4% inflation may be acceptable for some/many of them.
Maybe the silver lining is that Powell really makes good on his word (albeit slowly) and eventually, savers can get a reasonable return on their money.
A safe 5+% return would seem like heaven on earth these days.
Except “a safe 5% return” means you’re still losing almost 5% per year. 0% return with a CPI of 2% is a much better deal. See the problem? The FED’s war on savers and grandma has taken a savage turn for the worse.
“Grandma, you can’t afford to eat cat food anymore. You can’t afford to eat anymore.”
Well, I understand your point, but…
By “5+%”, I was thinking of a zone with not only a reasonable return, but also a reasonable drop in CPI.
Additionally, as an older saver, the main components of CPI do not hit me nearly as hard as some folks.
In the 5+% zone, I’m backing up the truck.
I’ll be in line with you too.
Treasury Direct -> I bonds. You can get 9% interest, on up to $15K per year.
10k per SS#
I have not tried it myself, but if you overpay taxes during the year, you can direct up to $5K in tax teturns to TD/I-bonds (on top of $10K). I could be wrong on some technicality.
andy is correct.
If you set it up to have a $5,000 tax refund from the IRS, which is the USA Treasury, for 2022, then in 2023, you can direct that $5k to buy I bonds in addition to the $10,000 that you use directly from your bank to Treasury Direct for the yearly $10k limit.
That is my game plan.
Yes, I see he is correct. So, how do you “direct” that 5k?
It says something about the 5k needs to be “paper”. Do you buy from a bank and must use a Treasury refund check to do so?
Seems like a lot of hoops to jump through for a not so big investment.
Of course, if you hold 30 years, and do it every year, and inflation stays high, I can see where it could get interesting.
I bonds are variable rate bonds. They pay a rate based on a base rate and CPI. So if you bought I bonds a few years ago, there were years when they earned 1% – 2%. The same bonds now earn 9%. But if CPI goes back to 2%, the same bonds will earn 2%.
People need to realize that it’s not 9% forever. It’s 9% this year, and some other rate next year, etc.
We’ve maxed out buying I bonds for years. One of the basic things we do every January. And there were years when returns were lower than brokered bank CDs and it makes you question the wisdom of I bonds. But we still love them. We bought them specifically for periods just like this. One of the eggs in the basket. Tax advantages too.
Oh, the limit per entity being $10,000 per year, it’s not really anything you can move a lot of money into suddenly. This is something you’d do every year over the long term, no matter what I bonds pay at the time.
I read it that the ”base” rate is permanent and based on the FFR at the time of purchase, and the CPI rate is adjusted every six months for the life of the IBond.
And there are some restrictions on selling early.
Is there some other caution one should be aware of and studying for these bonds?
Yes. The base rate = 0.1% on some of our I bonds and maybe 0.2% on others. The base rate is somehow linked to a short-term Treasury yield, but it’s not locked in… I forgot how this is determined. But there are older I bonds out there (before 2008) with much higher base rates. And we might get higher base rates in the future when short-term Treasury yields rise and stay higher.
Banks won’t even be shamed into paying higher rates on savings accounts now. It’s a huge profit machine and growing as the Fed raises rates. Decent or fair returns on savings ain’t gonna happen and people (the cattle) are used to it.
Great report. Why would the market react when there are still suckers (buyers and holders)? Wall St makes money either way. I think the large diverse pool of equity owners believe assets will rise. That mindset hasn’t flipped. Maybe it won’t. Just like the consumers that spend no matter what. But it’s like a smoldering powder keg. If something happens it will be unpleasant.
Delete ‘money’ and insert ‘credit’….and note that while the Fed has influence over credit, it has control only over its own issuance as fiscal agent of the Treasury.
It will flip, and then swing all the way to “you have to be crazy to invest in stocks”.
“Markets Are ‘Fighting the Fed'”
AKA what happens when simplistic garbage economic models interfere with free market forces.
Good Report
We’re back to work in the Swamp after being off 2 months to do some emergency sewer replacement on our house. Apparently the builder (71 years ago) put the sewer lines to the street on an uphill grade by 1 foot and the whole system had to be replaced from the house inside to the street. Total cost $25K. Not much fun.
Bless you. Had to go under the neighbors’ yard recently, re-piping out to the alley. But thinking of it in amortized terms, spread over the service life, made it less traumatic.
Around Here N Cal they have “Fast Track”is legal and up to code
also called anchorpanel.com/retro.html
I payed $15 K , A crew comes and tunnels under the house and places Hydraulic Jacks with Lines to a Pump Truck and they raise the House 17.5
inches at a time then reset the jacks to continue up . For a second floor you can get a Grade Beam poured as well on a bearing wall.
Works great Perimeter Concrete foundation.
I use it for fixers and my own home with Zero Issues
That’s an incredibly cheap price for that amount of work and material.
How did your poop run uphill for 71 years?
That’s the number one rule in plumbing: Poop don’t run uphill #2, you get paid on Friday.
Brant-that far back septic tank setbacks weren’t strictly observed, or even codified (A BIG problem in NE WA and ID Panhandle when i lived there). Might be the case for my neighbor up in Mendo as CA is cracking down on old/substandard sewage arrangements (subject to his further input, of course…).
may we all find a better day.
The market participants are smacked up, the Fed heroin made them all addicts, the shorters, the disciplinarians have been killed by the Feds constant rescue of markets, Ya absolutely correct Wolf, but Powell is weak.
As I said many times markets have to collapse to bring back discipline, fear has to be so huge that gamblers learn, only when they lose it all & beg for a job at McDonald’s will this end.
That means stocks, Property & commodities collapse 70% plus, it’ll happen, it’s all symmetry, the pain has to equal the euphoria.
Yeah, I doubt Powell has the spine or perhaps the imagination to weather the demands of this dynamic. Bernanke at least was steeped in the Depression. This is a new and different point of departure, founded on the unraveling of the Bernanke era. Bernanke had some dry powder to deploy, opening new vistas of Fed magic tricks. We are down to the empty bottom of that particular magic hat. I hope no utterly crazy “exogenous shocks” arrive too soon. Just keeping this vessel aright is a lot.
But maybe the masses, valiantly vacationing, spending and buying stocks and crypto, etc., will take some of the hits for us!
phleep, He doesn’t have a choice, it’s either he fight inflation & collapse markets or inflation rages & markets collapse even worse. The less damage is fight inflation, protect the $, either way a reversion to the mean will happen, no escape & that’s 70% plus down. The faster the better.
Right on. Bring it.
Jack
Yep. So many reaped the magic money since COVID drove monetary policy starting in March of 2020. And now they feel entitled to that money….
The Fed FORCED investors into the markets by pounding long rates…..and they still suppress long rates to paint the yield curve.
“Bernanke at least was steeped in the Depression”
Bernanke is perhaps the greatest crackpot to ever serve as Chair of the FED. He has ZERO credibility.
Even if Powell were to stick to his guns, politicians will flood the world with money.
We are royally fooked by our so called ‘leaders.’
Butters,
If Powell does “stick to his guns” and continues QT, the politicians can “flood the world with money” (run bigger budget deficits), but those deficits will have to be funded with the issuance of debt that won’t be monetized by the Fed. That debt will have to be funded by pulling money out of other areas of the economy, which will deflate those areas. And interest rates will have to rise on government debt to draw in sufficient enough demand.
Johnny5
“If Powell does “stick to his guns”
Mr. Powell is NO Mr. Volcker, proven by his own past record.
He has NO guts unlike him, nor his integrity!
Sunny129,
I’ve never met Mr. Powell or Mr. Volcker, nor do I know much about their personal lives, so I’m not really in a position to comment on their integrity.
But I will go out on a limb and claim that Mr. Powell does in fact have a stomach.
Understand that MMT promotes deficit spending, and relies NOT on higher interest rates to fight inflation, but higher taxation.
Note the big TAX bill Schumer is pushing forward….and the tepid and tardy Fed rate responses to inflation.
So the arrangement that is MMT is to enlarge govt, first by reckless spending…..then “fighting” inflation with higher taxation…. thus pulling money from the private sector into the hands of government to fight the inflation they promoted with their spending. Clever.
Sounds like everyone is desperate to talk the world into inflation, recession, and panic…
Forward-looking M money supply is falling, wholesale energy prices are falling, gas prices are falling, wholesale commodity prices are falling, used car prices are falling, Covid is fading, chipset supply is rebounding.
The outlook for 2023 is much better than many realize.
Then the economy can support few more interest hikes, no?
Is that you Biden? Falling prices but from a massive price spike, it’s not direction but affordability.
2023 will be a disaster & depression, ya looking also at yoy comparisons so it’s false hope.
“Sounds like everyone is desperate to talk the world into inflation, recession, and panic”
That’s a strange view, it’s just truth, most people are believers like yourself, is it fear that’s making ya say it, denial? Talking here has zero effect, but it does make people think twice, perhaps you prefer CNBC, CNN, ABC, BBC.
I think traders are betting on a long term fall on the U.S. dollar so the stock market is going up even as earnings will continue to fall. A fall in the dollar would also push the inflation rate upwards so that would cap any increases in the stock market. The bottom line is the stock market is still absurdly overvalued.
The Real Tony
The US $ may fall a bit but not to the extent many are predicting b/c there is alternative Global currency to replace it. EU was the closet competitor but it is in a crisis, itself.
Earnings may fall but remember nearly 50% of rise in S&P gain came from Buy-Back shares. As long as the FED is talking with ‘forked’ tongue, hard to trust it.
The mkt has been overvalued for a long time, courtesy of the most ‘wreck less’ Fed in history. Only a ‘Lehman’ like event either here or externally will change that.
The trend is my friend.
Some who held a good stock long term did better than day traders. Others held too long.
GE was a good blue chip stock. It grew for decades making shareholders rich. In 2000 it went down. It has been declining in value over 20 years.
David Hall
Without Fed’s intrusion with ZRP and Trillions, there would have been NO Bull mkt.
Without Fed’s put, there is no mkt of any kind in the World. May (?) be we are at an inflection point. Time will tell.
End the Fed! Roll the Heads!
Once upon a time Venezuela had 400% inflation. Their stock market went up 400%, but they were no richer than before.
But most ‘Mericans don’t own securities, so…..?
Most do not own securities even during the 1929 and 2008? Why people were affected by the crash?
It’s because thousands of banks collapsed after 1929 market crash, and people lost all their savings.
In 2008 those that borrowed too much were affected, not all. Today it’s even worse. People today buy Tesla stock planning to pay for a Tesla car with their gains, lol.
Most ‘Mericans aren’t invested in Tesla stock, or equities in general. So how is a counter logical rally in the stock market causing inflation in anything other than equity prices?
I know this is a rhetorical question. My point is stock market crashes indicates underlying low economic growth which is linked to job cuts and personal finance. Ultimately, this bites the common man who got idea what the wall street is doing. Then it comes to may be vote for the other guy and our problems are solved.
Anyone in a 401 k owns stocks
Check out median 401k balances. I do not see that having a balance of $4,500 (20-29 year olds) stabilize and even recover a bit after losing 20-30% is going to spark enough demand pull to cause inflation. Ditto $18,400 (30-39 year olds), or even $37,600 (40-49 year olds).
This is like the Battle of Little BigHornToad:
“Don’t fight the Fed”
That is a dictum that I really haven’t heard much in the past decade. 20 years ago it was a pretty common saying. I guess a decade or more of QE makes it pretty much meaningless… until now.
SpencerG
And suddenly now, it makes sense? Trust the Fed NOW talking with forked tongue!?
Sorry, I am on the skeptic side. Only when the real ACTION ( NOT jawboning) follow the WORDS, I might change.
See my comment below.
“Only when the real ACTION…”
Real ACTION: two 75-basis point hikes back to back, biggest since 1994. And you’re blowing them off. How many 100-basis point hikes are you going to blow off? When do you stop blowing off the Fed’s real actions? you see, this is exactly what I’m talking about.
“How many 100-basis point hikes are you going to blow off?”
Zero, which also happens to be the precise number of 100-basis-point hikes that have been done so far this cycle.
There was talk–remember?–of a 100-basis-point hike after the July meeting, but of course, in the event, no sooner had Powell put on his big boy pants than he peed all over them.
You “haven’t heard it much in the past decade?” It’s literally been parroted ad nauseam during this hellacious run-up in asset prices over the course of the past 2+ years.
Huh? What has there been to fight? The Fed couldn’t have been more in the pocket of Wall Street for the past decade if it tried. Bond fund managers were making fortunes (as interest rates artificially dropped) AND so were stock fund managers (as stock prices artificially climbed).
It’s hard to justify this stock market rally. If the Fed continues its tightening, look out below. If the Fed reverses course, it means the economy is tanking, and look out below.
In short, look out below.
Wolf
No one wants to ‘fight the Fed’ but which Fed?
Jawboning Fed? The one who pivoted suddenly in late 2018, when the Mkt started ‘tantrum’? The ones who didn’t ‘fight the Fed’ since March of ’09, got rich for the last 13 yrs. This Fed is NOT trust worthy.
You used write the ‘most wreck less Fed’ but suddenly, NOW, trust it b/c it is declaring(with forked tongue) to contain the inflation by increasing rates.
I go along and try to stay in the game, gain some, as long as the ‘perception’ is winning over reality, of course with hedges. Again this is a traders’ mkt. Besides historically there is 6-12 months lag between raising the rate and the response of the inflation. this opens for a lot of interpretation and front running. I watch the mkt in real time without any pre-conceptions.
Exactly, Jawboning is all this timid Fed can do. When it is time to act they start pissing in their pants. Saw what happened when they could have raised 100 bps at the July 27th meeting.
KPL,
“Jawboning is all this timid Fed can do.”
LOL, for how long have you been asleep???
The Fed has hiked rates four times this year, including twice 75 basis points each, the biggest hikes since 1994. The Fed has also started to unwind its balance sheet, down $75 billion so far.
So what?
When the inflation is 9%, raising the rates to 2.25% is a sign of timidity.
Not raising rates 100 bps at 27th July meeting is a sign of timidity.
Not raising rates between meetings and only jawboning when the market is playing Frisbee with it is a sign of timidity.
This is a timid Fed that pisses in its pants when it comes to doing its job.
Agree with KPL. So what. We still have an unprecedented gap between inflation and rates. Saying “we have done 2x 75bps roses for first time in decades!” doesn’t mean much without reference to inflation that is also massively high for first time in decades.
And coupled with the near-unanimous lack of any bold talk or projections from Fed around terminal rates far higher than their timid dot plots, this is just not enough.
The Fed hasn’t had to be more aggressive this year because markets were falling in line with the Fed’s rhetoric and actions, and the markets were tightening on their own through the first half of the year. It’s only been in the last month that the markets have started to “fight the Fed”, and conditions have started to loosen again.
I’m sure Powell and the Fed thought the 75bps hike along with the hawkish press conference would be sufficient to jawbone the markets back inline, but that clearly has not been the case. The fact that two Fed officials have come out so quickly afterwards to proclaim that the markets aren’t getting the message demonstrates that.
This is just the first serious test of the Fed’s credibility on this tightening cycle by the markets. And the Fed likely won’t tolerate these looser financial conditions for too much longer. The longer they persist, the more the benefits they achieved in the first half of the year will be unwound, and the more painful the medicine will be down the road.
I’m basically just repeating what Wolf stated in his podcast.
Jonny5
“The Fed hasn’t had to be more aggressive this year because markets were falling in line with the Fed’s rhetoric and actions..”
Yeah. Sure. How many times I have read here ‘ Fed doesn’t want to shock the Mkts’ The rates went from 0.25 to 2.25%. Did the mkts get the message. NO, at least for now. Why? B/c this Fed has a problem of lack of credibility, from the very beginning.
They are owned 15 mega global banks. Bailing out the banks was the primary, right after the GFC. NOT the economy or the bottom 90%, who got repression of rates for their savings! I need to see more ACTIONS and not just mere words or rhetoric.
Correctomundo, they could not care less about the bottom 90%. But the risks to member banks are rising with low rates anf high inflation.
Of course the Fed doesn’t want to shock the markets – if it doesn’t have to. Volcker didn’t want to shock the markets either, until the markets forced him to.
If you need to let some air out of a balloon, you’d don’t want to pop it. Sure, it would be more dramatic and exciting, but your balloon would be completely deflated and you wouldn’t be able to use it again. Which is why you want to let the air out slowly and in a controlled manner, if you can. That way you still have some air left in the balloon when you’re done. And even better, you can balloon it back up again when you’re ready to party.
sunny129,
I feel like the Fed took it to heart when I kept tarring it with “the most reckless Fed ever.” Lots of people in finance read these articles, and there has been a sea change in the Fed’s actions since those articles were published. So I modestly take credit for having effected that sea change in the Fed’s actions, hahahaha
More seriously, there has been a sea change in the Fed’s actions, and it probably had little to do with my articles, but the Fed is now on the right track and going in the right direction, even if too slowly.
Perhaps Powell had Johnson/Cronkite moment, as in “If I’ve lost Richter, I’ve lost America”.
andy-good (tongue firmly-in-cheek) comment! (quick quiz for five bonus points: ‘…who were Johnson/Cronkite, and what was the discussion?…’).
may we all find a better day.
It was President Johnson, Walter Cronkite, anchor for CBS, mid-late sixties, Vietnam War was the subject: Should we continue it or not.
That’s my guess.
How’s it goin’, 1stCav(AUS)?
:)
TomP.- five points!
(Otherwise, as usual, it’s too early to tell, but so far, so good…).
may we all find a better day.
I’m guessing that if the dollar were not the world’s primary reserve currency, the pace of both QT and hikes would be much faster. I’m still puzzled by the refusal to start winding down the $120 billion/month QE for over a year though. There is something behind the scenes not being said about that exceptionally long smoke break.
Wolf
1. How much of the Feds balance sheet (T-Bills @ MBS) have been loaned to primary banks to inflate their reserve balances?
2. How much income was made by these primary banks in loaning bank to the Fed these same reserve balances this last quarter?
3. Does QT now mean that OMO desk stops working?
Thanks, John
Johnny G.,
your #1 question: $3.71 billion (with a B) as of July 27 has been loaned to Primary Dealers, out of total assets of $8.89 trillion (with a T). Not even a rounding error. The Fed charges 2.5% for these loans.
your #2 question: Not sure I understand your question. But let me give it a shot: The Fed lent $3.71 billion to Primary Dealers at 2.5% (rate since Wed.). If Primary Dealers deposit this same $3.71 billion at the Fed as reserves, they get paid 2.4% from the Fed (the rate the Fed pays on reserves as of Wed.). So if Primary Dealers actually do this, they LOSE 0.1% APR on $3.71 billion.
your #3 question: No. But it will be a lot less busy. As part of QT, the Fed replaces the amount of securities that roll off in excess of the “caps.” The roll-off cap is $47.5 billion per month from June-August and goes to $95 billion per month in September. There may be months when the roll-off is less than the cap, in which case the Fed doesn’t buy any securities.
Wolf,
I’m very curious if you have listened to Jeffrey Snider and his ideas about the Fed.
I’m a knuckle head, so cut me some slack in my interpretation of his ideas. His thesis is about eurodollars and the curve inversion in eurodollar futures market indicating very strong *deflationary* signals. Another of his arguments is ‘QE is not “money printing”‘ — his argument having to do with bank reserves being only inter bank tokens and not actual currency. If I understand him correctly, he is saying that the low long-term treasury bond yields are an indication that there big problem in the eurodollar banking system (systems outside of U.S. regulation) with respect to a shortage of collateral — that there is a high demand for collateral (and maybe that shaky borrowers are facing higher collateral requirements) — so, a *tightening* of credit markets, not a *loosening* of credit markets.
Anyways, my fragile, walnut-sized finance brain is getting these very convincing counter current messages while trying to learn about finance and money — you with the thesis that inflation is going to be stronger and longer-lasting than the prevailing mainstream view; and Jeffrey Snider with an argument that deflation is under-appreciated. I think you might be interested in listening to him. I’m not posting this with any agenda or to promote him or anything, other than I have learned a lot from listening and reading you on wolfstreet and also discovered this other very compelling mind out there with what *seems to me* to be a contrary message. I would love to hear your thoughts on if you’ve heard his thesis and what you make of it.
Cheers.
Snider’s articles on these topics are moronic, idiotic, and ignorant all mixed together. What he does on his site is his problem. Don’t drag these idiocies into here.
If you want to discuss his BS, do it on his site. And if he shut down his comments, maybe that’s why.
Assume the market does not pay heed over August does this timid Fed have the gumption to raise rates before Sept meeting?
Does this timid Fed have the gumption to hike more than the market expectation at Sept meeting – without whispering in somebody’s ears?
Till the Fed sheds its timidity the markets will toy with it. When you act like a toothless and timid tiger you get treated like one.
At this moment market is treating the Fed like its pet dog and playing Frisbee with it.
The broader markers are IGNORING REALITY and the wise words being issued by the Federal Reserve and its FOMC at their own peril.
It is the Fed that is IGNORING REALITY that jawboning will not do. Why jawbone when you can land a punch.
It is akin to a boxer telling an opponent I will hit you but never landing a punch.
Instead of pleading (jawboning) with the markets the Fed is it has the gumption should hike more than what the markets expect and also hike between meetings. It just does not have the guts to do it.
Waiting for October. Enjoy the roller coaster until then.
DawnsEarlylight
‘Waiting for October’
Fed could very well pivot, just before the mid term elections. Oh. No. it is independent, wouldn’t do that, right?
You mean November 9th.
There’s no pivot coming. The Fed is playing nice… until leading up to the elections. Then it’s Hammer Time!
Been in the mkt since ’82. Gone thru 1 Bear and survived. I cannot count how many 100 times I heard ‘ Don’t fight the Fed ‘ and also Mkts always look ahead before the Economy. All true, under our genuine, good ole Free Mkt Capitalism, as it was before ’09.
Now the mkts and the Economy remain distorted by Fed’s intrusion with ZRP and Trillions upon Trillions of ‘easy-peasy’ money printed out of thin air. Price discovery actively suppressed.
Party has been in full swing until this February. Fed promptly replenished the punching bowl promptly when ever S&P went down even 2-5%!
And now we are told ‘NOT to Fight the Fed’ ? Does this Fed has any really ‘earned’ credibility? No. It is being manipulated politically, but still claims it is independent!
Can they afford to keep rising rates and push various pension funds and the retirement of millions of workers( including baby boomers, retired and close to retirement) into impoverishment? If one thinks, yeh, they could. Nothing more for me to say.
The causes of the 2008 crash were never actually resolved. Instead, the Fed papered them over with debt, trillions of it, and kicked the can down the road, and those causes have been carried over. They’ve gotten a bit mushy over the years.
These days the fashion is to rack up debt and call it growth. Debt is increasing faster than GDP. Debt-fueled ‘growth’, like other irresponsible production, generates its own externalities and distortions, and those are showing up as inflation and recession because they can’t be papered over with debt indefinitely.
It gets worse. Since the 19th century ‘growth’ has been fueled with fossil fuels and the overexploitation of other nonrenewable resources, not merely economic growth but particularly population growth. As nonrenewable resources are depleted their cost and price increase, requiring even more debt and the generation of even more of other externalities, like human population growth which has increased from less than one billion 200 years ago to over eight billion next year, most of whom need too much and all of whom want too much, despite the sad, sad limitations of what can ultimately be supplied.
Y’all are like a bacterial colony that’s outgrown its petri dish and suffocating in it.
The Fed is raising interest rates because they can’t kick the can down the road any more. They’ve run out of road, and they know it. So my prediction that it will be able to neither control inflation nor mitigate recession is an easy one.
A similar and more serious situation obtains with the extraction, overexploitation, and accelerating depletion of nonrenewable resources. Those resources are finite, and becoming more finite all the time, so that can can’t be kicked down the road any more than a few years either. That ecological prediction makes the economic prediction even easier.
But it is also easy for people to believe that somehow everything is going to be okay, because that’s what people want to believe, and people will believe anything even in the face of conclusive evidence to the contrary. The right to personal delusion and self-deceit are guaranteed by the 1st amendment, so have at it.
I used to tell people to save themselves. I don’t do that any more, because it’s become disingenuous. Now I tell them to enjoy it while they can, and to try to assure their children that it’s not their fault, at least not entirely.
The truth may set you free, but it may not, and either way it’s certain to make you miserable, because reality, regardless of how cleverly it may be denied, always remains reality. I’ve promised not to gloat when the worst happens, at least not publicly, but good luck holding me to it.
Enjoy it while you can.
Apparently Rome had no national debt or a central bank. So how did their currency function? The empire owned the mines and coined money to meet their needs. They had no welfare state but food was heavily subsidized by the state. The coins where primary used to pay for the troops and state expenses. Not so different from today.
Yeah and just like today the state spent beyond its means and debased its currency by minting the coins with more base metal than precious metal. The resulting inflation even lead to an attempt on price controls: Edictum de Pretiis Rerum Venalium, “Edict on Maximum Prices”
Shawn, u can find 2000Y gold coins sent from Rome to colonial gov
or generals, because there was no use for them. The trimmed/ chipped gold coins weight was adjusted for wheat prices coming from Ukraine, the food basket of the world.
Dr Haber the inventor of the industrial Nitrogen is the cause of
the inflation. Eight billion people/ depleted commodities.
Doomsters have been calling for the end of planet Earth for thousands of years. Malthus spent most of the 1800s telling everyone the world would run out of food… Peak-oil spent most of the 1970s telling everyone the world would run out of fossil fuel… Climate protesters today spend most of their days telling everyone we’re all doomed… And, of course, it never happens.
It only has to happen once. :)
Never say never…
“And, of course, it never happens.”
I negated your objection with paragraph 7 in advance and you STILL managed to prove my point.
Much appreciated. Now reread paragraph 9.
R2D2-only as long as a contemporary technology (particularly in the areas of food, freshwater, breathable air and always more-efficient usage of available natural resources in the face of an enormous increasing demand (think that most of today’s world would like to live at what we term ‘first-world’ level) can continue to buy us time. Study of earlier, ultimately failed civilizations reveals that they exceeded their contemporary resource limits relative to what their existing technology in use of those resources could provide to their populations.
Species-extending technology cannot be dictated any more than guaranteeing a reliable Sierra Nevada snowpack. We can only recognize and remember to retain adaptation to planetary realities, and our part in it, (which, barring blind luck, is all that has kept us at the dance) in our toolbox…
may we all find a better day.
That “enormous increasing demand” is the problem. Somewhere along the line, “standard of living” transitioned from health and happiness into material accumulation, over-eating, and glamour travel. People in advanced economies have more than they’ve ever had, yet they’ve never been more miserable.
It’s time to appreciate simpler sustainable lifestyles and pleasures.
R2D2
What was the Global total debt during Malthus time? Population 200 yrs ago was less than 1 Billion. Now heading towards 8 Billions. How many Millions have died by lack of pr0per nutrition and or under nutrition since he died?
The global debt is now over 303 Trillions. Debt to GDP over 200%.
If more debt can solve the problems, why NOT print more, right?
There is a big difference between “it never happens” and “it hasn’t happened yet”. The human race has been very successful at replicating itself in ever increasing numbers. That past “success” doesn’t guarantee future “success”. If we did reach some kind of population limit, it might be decades or centuries before what might be left of the human race, in looking back, comes to a historical consensus that unmanaged population growth led to catastrophic results. We are in just such an existential debate regarding the Climate Crisis right now.
For Hollywood, where the “good guys” often stop the “bad guys” at the very last second, I am no longer counting on that Hollywood ending for the human race.
R2D2: your comment reminds me of an old joke.
Mother: Son, you need to stop masturba*ing. It’ll cause you to go blind.
Son: Stop me when I need glasses.
And I should add that your logic on the “hasn’t happened yet” rationale is completely absurd.
Once we cut out energy use that provides questionable enjoyment or utility, I think today’s energy use could be cut by 50% or more without losing much. We should start appreciating and utilizing what we have. At some point, it will probably be forced on us.
You don’t have to think long to identify numerous things we do or buy that are unnecessary and waste energy.
It’s estimated that the US wastes 40% of its food. That could be reduced by 20% with some pretty easy changes, but that won’t happen because it would crash the American agricultural industry, cannabis excepted because Americans never let that go to waste.
A lot of the food that IS EATEN is wasted on excess calorie intake that causes health problems and decreased standard of living.
What’s the utility value or social redeeming value of various cities like Las Vegas built in desert or winter resorts in comparison to our necessity of being fed, clothed and adequately kept warm during winter. The top 10% who have over 90% of Wall St wealth will vehemently disagree with you!
The USA has 5% of global population but utilizes the 25% of natural resources, as if it is our birth right, for decades. Wonder, why millions are to emigrate here via land and water?
I was watching an episode of Sopranos last night. Chris offered Tony Soprano some stolen tickets for an all-paid Australian vacation. Unimpressed, Tony glanced at the tickets and said “it’s like Sarasota, after what…..a 20 hour plane ride?”
“Y’all are like a bacterial colony that’s outgrown its petri dish and suffocating in it.”
Unless you are preaching this sermon from a different planet than we are on, you are in the petri dish too!
AA-at the risk of speaking for una and others, as well as myself, that’s not news to us…
may we all find a better day.
One of the most powerful delusions is the fantasy of escape. It is a vast industry. Paraphrasing the book Hyperobjects: nowadays there is no more “away.” There is not an “outside.” Consequences just swirl around and back. Acting out escape fantasy just damages the vital systems more. If you love Hawaii, DON’T GO THERE. Crowds are toxic. Human massed attention is toxic. Full stop.
phleep-triple check.
may we all find a better day.
Good on both ya’s comments……..but changes nothing, as you well know.
Xlnt. I’ve been saying for a little while now that our real problem that we’ve reached at this point is overpopulation. We’ve ruined the climate and run out of natural resources for the amount of people we have. Nice post. Enjoy yourself now. Myself, I choose to enjoy myself later.
Spot on all the way….another wrinkle to the problem is the fact that PTB, mainly in the West, no longer have exclusive control over those finite resources, and are desperately grabbing for everything on the way out….it explains a lot of the geopolitical gyrations lately.
This is the Devaluation period where the central bank begins to get serious about fighting inflation in alternating phases of increasingly aggressive hiking, pausing and easing. The Fed has already pivoted for 2022 H2 but a more serious fight is coming in 2023.
Think it through… They won’t do an entire year of tightening during an election year. They know they can always resume after mid-terms and Santa rally. Anyone who thinks this is a one-trick-pony ‘tighten in into a recession’ plan is a simpleton.
1) Don’t fight the trend : Coffee, up 1.6 from 1.02 in Nov 2 2020 to 2.60 in Feb 2022, down to 1.95 in July 12 2022, retracing 40% of the move.
2) Lately, gas stations selling junk food and junk drink raised their coffee
prices by about 40%. They regressed in stepping stones to just 25%,
because the lemming could take it anymore, or couldn’t afford
“everything can go higher”, because mgt can stick to them.
3) Don’t fight the trend had a Change of Character Speedways cut HQ 855 jobs
4) MCD didn’t raise : ” $1.00 any size from small to large, with cream
and sugar, because MCD mgt is more sophisticated.
5) On Sun MCD employ teenagers 15Y -16Y not to save wages, but to train zoomers – who hate Meta – for life in the real world.
6) Old hippies hate avatar, but millennial love Meta, because Zuk have
no friends.
It is a new world, where over charging is a game b/c it is inflation!?
“How Much of “Inflation” Is the Price Being Jacked Up Under the Excuse of “Inflation”?
For examp: what about auto and property insurance? Exactly what input costs justify jacking up auto insurance by 14% or property insurance by 20%? Does insurance consume huge quantities of energy and is therefore exposed to higher fuel costs and container rates from Asia? No. Did higher energy costs trigger massive increases in auto or property claims? No.
Maybe real input costs have risen 10% due to energy, healthcare, wages, etc., but this provides an excuse for raising prices 20% or more. “Inflation” is a great cover for rapacious profiteering.
(h/t Oftwominds)
Our Illustrious Blogger refers to that as The Inflationary Mindset, of the psychology of inflation: people pay even when prices go up because they expect prices to go up, even though it’s nothing but greed. This makes for an extremely self-destructive self-fulfulling prophecy, one that is very profitable for the devotees of pleonexia.
To quote Agent K: “What a gullible breed.”
Not me they raise prices ,I don’t buy till it goes on sale , seems to be working.These fools can only hide food in cold storage so long or it goes bad.Besides I’m tired of this inflation bs quit buying watch how fast it disappears
Buffets got to make a living
Buffet is postwar USA world order and world view. Sell ice cream and candy to more buyers.
I am watching that path grow more erratic. The zeppelin is wavering. Soft landings?
Poor masses still valiantly spending while somebody has massive loose change to dump into markets, bitcoin, vacations. If there is a buyers’ strike, where are the future earnings? Cynical Faith in the Fed but financialized buyers against the recovery of anything like a normal economy. It is reminiscent of a certain hedge fund beating the Pound Sterling in the 90s, into capitulation. If the Fed capitulates, the whole order might up upended.
Meta is worth $427 billion. They earned over $33 billion ttm. If your start up was worth that much, you might have a few friends.
The nation that downsizes its consumption to what’s available will survive, those which attempt to live beyond their means via financialization will collapse.
There is ENOUGH for every one’s NEED but NOT for everyone’s GREED
M. Gandhi
Wolf, what’s your opinion on CHIPS Act and EV credit? Physical stimulus during inflation time? Semi and EV industrial policy?
I hate that Congress subsidizes the biggest and richest companies that already have huge profit margins and that blew tens of billions of dollars on share buybacks. But corporate subsidies – such as this corporate enrichment act – are always a bipartisan priority. It’s one thing politicians from all sides can agree on. We have the best politicians that money can buy.
But the amounts are too small and spread out to have much impact on inflation. What galls me are the corporate subsidies.
I hate EV tax credits. These vehicles can do just fine without them. There is such huge demand that you cannot even get them now. What the extension of these credits are doing is enrich GM and Tesla. More corporate subsidies. Best politicians that money can buy.
BRK/B : up 200 from 160 in Mar 2020 to 362 in Mar 2022, down to 268, retracing 50%, after all the buybacks.
BRK/B is hooked to AAPL and BAC, instead of WFC. AAPl is hooked to Xi.
Captain Ingham/ Munger must lift BRK/B, because he never sold BRK/B
shares, because the trend is up since 1922.
Recession : gun show traffic is slow.
Gun show traffic is slow because the market is saturated. Six mass shootings yesterday (7/31), 29 injured, 2 fatalities. Industrialized mayhem doesn’t happen in civilized countries.
Like a diseased organism, the opportunistic pathogens can move in.
In the rest of the “civilized” world, gun ownership is not a right, it’s a privilege. So authorities have broad discretion to prohibit the ownership of guns to anyone they please.
Unamused – gun show traffic is down because gun people window shop at the shows and then buy from GunBroker or local shops or individuals. The people who are lately new to gun ownership in the US often went and bought an ill-advised gun without access to training or sufficient ammunition and spent too much, but by now they’ve largely figured that out and bought the guns that they think they’ll need already, and to the extent that they’re spending money are looking for ammunition now. Shows became a price ripoff, especially for ammunition in certain calibers that are in short supply. The sponsoring municipalities make eight bucks a head admission and parking and kids need food and stuff. I knew the resident agent in charge of the local BATF office twenty years ago and he had never been to a gun show in his life. I haven’t been since, but I know some dealers. My only interest is obsolete calibers for some old Winchesters that I don’t shoot much.
“Industrialized mayhem” seems to imply that industry makes mayhem worse than individualized mayhem would be.
People sometimes do evil. They may have evil motivations and create evil outcomes through any means at their disposal. Technology is the shiny object for reformers that would ultimately distract from the real problem. I was talking with my dad last night about this. As a child, I would never have talked back to any adult, because that’s what my parents required. Not asked for, or saw as desirable behavior or negotiated. They required, end of talking until I did what I was told to do. Kids who figure out how the world works get less dented when they run into it. And grow into adults with standards of behavior. A society that can’t require it’s young to behave when they’re children has a terrible future to look forward to. Guaranteed that these sicko’s didn’t grow up with good examples being set for them and they just rejected them out of hand. Supposed to train the bad out of them before they get to money, guns, cars, and drugs. Gun control is behavior control, and that originates with moral, responsible parenting. Easy for a person with no kids to say, of course. I know my limitations, uncle of ten is good.
Gun fetishism comes easy for you, doesn’t it Rick?
unamused – I’m afraid I don’t understand the question. I grew up in an effectively gun-free country and arthritis keeps me from shooting now. I save my hands for productive work. I have a couple of guns for my nephews to shoot when they visit and go to the farm. I have no illusions about guns. Other than wasting a box of shells or two trying to hit mourning dove in Comal county once I’ve never hunted. Guns entail responsible safe storage and tie up space and capital. It’s probable that the vast majority of people would never need a gun to defend themselves. And most gun dealers today are mercenary opportunists that would make a fentanyl peddler blush. The business exploits fear for a living now. That’s shameful. You seem to have no difficulty with self-expression, perhaps you’d care to explain what made you decide that gun fetishism is a thing and why I have whatever it is according to your definition. Without enriching the goog i think it is some sort of insult, but I only accept prepaid insults. No COD, sorry for any inconveniences.
Wolf refers to an “army of trolls that spread nonsense around the Internet”. And he mentions that the media is doing the same. I’ve wondered about this, and I thought it was an opportune time to ask. To what extent am I receiving biased information online because the author has an ulterior motive? Do you think that many of the current asset buyers have become susceptible to these trolls? Thanks, Rose
RoseN-might posit that there have always been trolls, dating back to the early common water-hole gatherings of our species. Ever-increasing speed of communication over the centuries has just made trolling (as vicious gossip or financial crime) more available to those who would gleefully embrace the temptation…
Humanity staggers on in its simultaneous magnificence and miserableness…
may we all find a better day.
Very true, 91B20 1stCav (AUS). And very beautifully stated!
RoseN-you are most kind.
may we all find a better day.
1. There were literally lines in front of high end stores in SOHO this weekend. Lines to shop!
2. You talk about Meta losing massive market cap yet their remaining market cap is still MASSIVE along with a bunch of other insanely valued companies.
The amount of money available now as compared to the 80s is simply staggering. A handful of people could buy most of what is produced in a year. The Fed would have to remove TRILLIONS at this point to get us back to a state where we can have wide spread prosperity.
IT’S NEVER GOING TO HAPPEN! LET THAT SINK IN AS YOU LOSE A SHIT TON OF MONEY THINKING THEY CARE ABOUT THE REGULAR SCHMUCKS
Well it happened in 2000 and 2008. All they need is a scape goat to take the blame… again.
Arya,
“The Fed would have to remove TRILLIONS at this point to get us back to a state where we can have wide spread prosperity.”
Powell indicated that the Fed plans to do just that. According to his comments during his presser last week, they roughly plan to shrink their balance by 2.7Trillion over the next two and half years.
“…So I guess your second question was getting– the process of getting back down to the new equilibrium will take a while. And that time, it’s hard to be precise, but the model would suggest that it could be between two, two and a half years, that kind of thing. And this is a much faster pace than the last time. Balance sheet’s much bigger than it was”
2.5 years x 90billion per month = 2.7Trillion
Neel Kashkari was on Face the Nation citing a strong commitment to taming inflation.
Other Fed officials may be coming out with more strong words of commitment this week, and I doubt the market rally will hold up in the face of this.
I predict a 2-5% market drop this week, with tech stocks dropping more.
Neel Kashkari
is dying to be Fed Chairman…..
is an interest rate “dove”
embraces MMT
Not anymore. “Even if we’re in a recession, it doesn’t matter,” and interest rates will go higher until inflation is heading back to 2%,” he said this weekend.
So that’s your dove.
Now wait until the hawks are speaking out.
Markets are just delusional about this.
Wolf , thanks alot for your efforts.
It’s really weird to see all those interest free ,Buy now pay later BNPL that do the free short-term lending while the fed is raising rates by 0.75% ,
I want to point out of last month, During ECB forum 29 June , where powell& lagarde agreed that they suspect the era of low-inflation might not return, powell said he wants to prevent that, lagarde didn’t commit to that and seemed to have taken that as a fact of changing economic during / after the pandemic
Powell : “What we don’t know is whether we’ll be going back to something that looks more like or a little bit like what we had before — we suspect it’ll be kind of a blend.” Powell said.
Powell : “We’re learning to deal with it.”
Powell: “We understand better how little we understand about inflation”
I hope you could share your insight on this , wether low-inflation environment coming back / 2% target still feasible to hold as target
Regards,
Joseph…
Powell also said …
“When you and I (speaking to Sen Kennedy) studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth,” Powell said, referring to one main measure of the money in public hands. “Right now … M2 … does not really have important implications. It is something we have to unlearn I guess.”
He said this Feb 23, 2021. Soon we were involved in a great inflation spike.
So we dont have “earn while you earn”, we have “UNlearn while you earn”.
“It is absurd to place important decision making into the hands of those who pay no price for being wrong.” T Sowell
Yellen…..”we werent wrong, the theories we chose to follow were wrong”
It is past time to have formula drive “guard rails” for monetary policy. If inflation is X, Fed Funds must be a function of X. If inflation is indeed transitory, then the interest rate policy reactions can be transitory also, right?
‘Powell: “We understand better how little we understand about inflation”’
You could explain it to him, but it is difficult to get a man to understand something when his salary depends upon his not understanding it.
I have yet to see any Fed chair know how to deal with and understand the greed of Wall Street. Greenspan commented regarding his error, ‘I thought financial institutions would regulate themselves”. With the amount of money in the system they put and the velocity of it they will always be behind the curve in both directions because of wall street’s greed and panic. I don’t expect wall st to take the Fed seriously until the news each day talks about all of the massive layoffs, foreclosures and financial institutions clamoring for bailouts facing insolvency. But who knows, maybe a 5000 point drop on the dow all of a sudden might get them to catch up.
ES daily, S&P 500 futures, entered Apr 16/20 backbone after wall street gangs induced AAPL and AMZN bull run. ES weekly is red, but it might spike before turning down to close July 26/27 gap, test the weekly July 11 fractal zone. ES retraced 0.886 of the wave from May 31 high down to Jan 13 low and 50% of the move from Mar 29 high. It’s time to test the base.
Didn’t Amazon (AMZN) have a loss of more than $2 billion in each of the back to back 2nd and 1st quarters of 2022?
US congress delegate visiting four (not five) Asian nations might be led by
j16 peleton throwing flares and aluminium chaff for “protection”.
Cable talking heads have their talking points for today…
“Fed to mitigate rate increases as economy weakens. May halt or pivot.”
Quite a recession rife with help wanted signs, packed restaurants, and no vacancy signs at resorts.
They figure that if they repeat a lie often enough, it’ll become a truth.
Yes, EXACTLY WHAT I SAID IN THE PODCAST. The media and internet trolls are fanning out to spread this delusion.
And they’re ignoring what the Fed actually said — including Kashkari over the weekend.
LISTEN TO THE PODCAST!!!
Random thought. The talking heads continually saying that the Fed will reduce its tightening, when the Fed said no such thing, may backfire. It’s human nature to hate when people put words in your mouth.
It has the potential to strengthen their resolve, rather than beat them into submission.
Looks like the RE market here in the Swamp has not gotten the message from the Fed. Did a Condo yesterday and the price was up 8% from a year ago. I see a repeat of the 1979/1980 Carter economic stew. Rising interest rates, rising prices, energy crises, disfunctional government, Russian aggression. People are now moving back to the city in droves to avoid the high gas prices, in spite of the high crime. We’re going to have to have Paul Volcker interest rates before long in order to dampen demand. When that happens then the whole house of cards will come crashing down worse than 1981/1982.
1’s & 30’s have inverted this morning… so the Markets are saying either inflation truly has peaked (which maybe it has but it hasn’t really backed down, so they are delusional), or the Fed doesn’t have the stomach for the ‘inflation fight’.
Either way, there’s gonna be a blood bath in the Bond Market!
Again….take another look at the back end of the curve….
then imagine 2.7 Trillion in MBSs and a few more Trillion of 10yr and longer maturities put into the supply on that back end….the inventory HIDDEN from the market by the Fed’s balance sheet.
The “new” Fed is bent on constantly suppressing long rates to “Force” the investor to take more risk. (which mandate is that?)
Looks like Mr. Market didn’t listen to your report.
Yes, and Mr. Market didn’t listen to Kashkari this weekend either. A dove-turned-super-hawk, driven by inflation. “Even if we’re in a recession, it doesn’t matter,” he said. Rates are going up until inflation is heading back to 2%, he said. Mr. Market is, as I said, delusional. But eventually, markets come out of their delusions.
I’m rooting for you here!
Looks like markets are now finally getting around to listening to the report. Just took a little while :-]
As I rode my bicycle past Kashkari’s office today @ 11:38 am CDT, I barked up at him with a, “Sell off long term Treasuries!”
All the windows were closed though, so he may not have heard me. Two of the groundskeepers who were mowing the lawn did. Neel hires that job out. Ya know, lunchtime on a beautiful, sunny day along the Mississippi, he could have lended a hand, and worked on his tan at the same time, eh?
Might we call this…fightening?
Wolf,
Brilliant piece (as usual). If monetary policy is going to have to tigthen even more to overcome the market’s resistance (as well as strong consumer balance sheets which means more consumer resilience), has your forecast of a shallow recession in lieu of a nasty severe stagflation scearnio changed at all?
It depends how long markets will be fighting the Fed — and they will keep doing it off and on, in waves, as interest rates go higher in waves, and as asset prices go lower in waves. This could drag out for a long time.
Hi Wolf,
Inflation nowcasting forecast CPI July 8.82 and Aug 9.06. GDPNow forecast Q3 to be +2.1% Labor shortage continue. What Sept hike do you think is the “fare” message Fed should deliver to the market? That should be a good indicator to cease the argument of Fed vs Market right?
Wolf
Yes the markets are currently not transmitting Fed policy as your podcast makes clear and markets are fighting the Fed.
Fed policy includes interest rate increases and QT which began June 2022.
QT can be regarded as an equivalent to Fed Funds rate hikes.
A working paper by Ben Wei ,Atlanta Fed, August 2022 explores the Fed Funds rate hike equivalency to Passive roll off of QT.
https://www.atlantafed.org/-/media/documents/research/publications/wp/2022/07/15/08–rate-hikes-and-quantitative-tightening.pdf
It suggests to me QT as currently constructed is equivalent to raising Fed Funds rate by 75 to 100 basis points (in a market with crisis) . Unclear to me is whether this is annually or over a three year period of QT.
Am I misinterpreting the working document?
It seems all the focus is on interest rate hikes and how far they have to rise before inflation is tamed. Historically Volcker Fed had to raise interest rates above inflation rate but QT/QE were not tools being used at that time.
Listen to the podcast. I said all that in the podcast. I said it many times in 2018-2019 during QT at that time. And I’ve said it many times now.
A lotta people have shat in their shorts.
So you have CNBC yammering:
“Treasury yields fall to start August on signs that inflation may be cooling”
And you have Truflation sitting at 10.10% up from 9.6% a week ago… so, what’s going up?
Food is up 2.3% on a week ago and Utilities are up 1.83%…
Utilities come this Fall will be interesting as we go into the Winter heating season and Utilities start to re-price their costs!
Inflation ‘cooling’? Not yet it ain’t, but Fall is right around the corner!
It’s always been stupid to fight the fed, but it’s even stupider to fight the markets.
Coinbase still spending millions on $$$ big 4 consulting projects.
The future so bright I got to wear shades.
Wolf, excellent job. I was wondering what the markets are thinking as to FF futures and equity secs rallies. The 10-year T yield had declined from 3.50% to as low as 2.65% while inflation expectations (inflation breakeven yields) declined to around 2.50% range as if Fed job was done. Hard to believe that the US economy current;y is not on a downward path regarding real growth rates. Your explanation of the Fed not being able to achieve its desired deterioration in financial conditions and trnsmission into the real economy was ironic as to Fed’s indicated intentions. Shows the lack of Fed credibility on the whole in markets. Takes a somewhat strong resolve to go against current market sentiments. Thanks.
On US currency it says “Federal Reserve Note”, and it says this above where it says “The United States of America” so there will be no disagreement as to whom it really belongs or who has priority.
The Fed is just letting you use it, presumably so you can use it to get into trouble.
The US government can generate tax revenues or it can issue bonds to raise money through debt, and it prints currency, but it does not create money.
In one way or another inflation is always related to excess money supply, and that is controlled by banks. Or not controlled, as the case may be. Prices may rise because of shortages, but if money supply is constant other prices must necessarily fall. Where supply and demand for goods and services are constant the “value” of money is almost exclusively a function of two variables, money supply and interest rates, and the US banking system controls both.
“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the government at defiance. The issuing power [of money] should be taken away from the banks and restored to the people to whom it properly belongs.”
Thomas Jefferson
Letter to the Secretary of the Treasury Albert Gallatin (1802)
The system is totally out of balance. The stimulus money trickled up and is now in the hands of those that profited already from QE. The result is even more rampant speculation by “investors”. Who in their right mind would actually want to work for a living in such a society?
I think I have expressed this on a few of your previous posts, but I think that the Fed has primarily been using tough words, but not taking serious action on the inflation front, and that is the reason the markets are not paying any attention to them.
The Fed still owns a mountain of MBS and Treasuries that are sitting on their balance sheet. If the Fed wants to be taken seriously, they need to start selling that debt, en masse. Just dumping it out asap. The current reductions have been a trickle and a bad joke.
Why should they take this tactic?
It is my guess that massive central bank balances reduce the ability of the markets to engage in real price discovery. And if the central bankers dont sell that debt back into the market now, when will they actually do it? Will they want to do it when a recession hits? Of course not.
So it is the Fed that is not being serious about inflation fighting…still. They are trying to jawbone the market, while at the same time barely selling off that huge balance of debt on their balance sheet. Talk is cheap, actions speak louder than words.
Honestly, I think that we have learned that all of these MMT economists are a joke. They need to get a refund from the idiots that trained them. Guys like Kashkari should be booted off the Fed board.
Maybe what the markets really need to see is some turnover in the Fed that shows that fiscally conservative Fed members are being elevated. I can guaranteed if someone like Volcker were put in charge of the Fed, the markets would finally start to believe that there is a new sheriff in town. How can any debt trader believe that the current bunch of Fed economists will have a spine to get inflation under control?
After all, the chairman of the Fed is a lawyer, not an economist by training. So we have a paid liar at the helm.
Cut all the BS. I’m sick reading all this crap. The Fed needs to put the interest rates above the inflation rate, and let the chips fall where they may. Until then it will be more of the same.
The Fed is doing exactly what they should do.
Crash and recession that can be attributed to not them.
Stop teeth gnashing and enjoy the show.
“Crash and recession that can be attributed to not them.”
Um, no. Every recession and depression in US history can be attributed directly to the Financial Industrial Complex, including the worst one, the most recent one, and the one you’re getting in a few months. Both WWI and WWII and the stagflation resulting from the 1973 Arab oil embargo can be attributed to the FIC more or less indirectly, depending on how you prefer to emphasize its roles, which were decisive.
Industrialists often despise bankers, for reasons which should be obvious. I have writings by Alfred Krupp deploring the rapacity of 19th century bankers but they don’t have the right vitriol in translation, but other quotes convey the general attitude:
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford
Incorrect. The 1970s stagflation was a result of bad monetary policy. The ‘Financial Industrial Complex’ is just a silly word for the finance industry that powers our world.
Cyto-have you, or would you, frontline soldier for that ‘industry’?
may we all find a better day.
Good podcast.
Simply put, you believe that Powell’s gonads are fully sized- he will continue to follow through. Current market participants measured and believe he may have been castrated. That he’s a political beast and will do a 180 as soon as he starts feeling the heat.
Personally, I think he’s somewhere in the middle. He knows what he should continue hiking, but is trying to be too nuanced… too perfect.
So all of this will get drawn out with smaller 25-point hikes that will make this a two or three year process.
Josh G
“All of this will get drawn out with smaller 25-point hikes that will make this a two or three year process”
NOT, if the core inflation remains 4% and headline inflation above 6-7%
This inflation erupting after 41 yrs of deflation, will NOT that easy to contain. it will remain stickier than most assume. Fed cannot do anything about rent(housing price still high up) Energy (volatile), Medical costs, Food or the supply chains. Can only curb demand. Cannot happen with baby steps.
4% rates aren’t doing diddly with real world inflation at 15% or more.
He has to be a little nuanced, or the public will think he’s hiking to create a recession, when recession is not the goal. Reducing inflation is the goal.
>>The crisis now unfolding, however, is entirely different to the 1970s in one crucial respect… The 1970s crisis was largely artificial.
Comment1: Note that James Charles is quoting himself here, do a web search on the text.
Comment2: The 1971- oil crisis was caused by President Nixon “closing the gold window”, meaning that foreign central banks could not get their gold reserves back without paying a much higher price. Oil producers naturally revolted against habveing to accept the same price as measured in devalued dollars,. and that caused the oil crisis. Any other explanation is mostly a cover-up.
Cytotoxic: “There was no Tulip Bubble. It’s all myth-making.”
One gets the feeling WR keeps you around just so the rest of us will have somebody easy to discredit.
Love the handle, btw. It’s so you.
Mkt indexes fought all the way, down to bell. Should have gone down by at least 1%, instead less 0.3%!
Hopium is still strong there. DIP buyers are still active. Only a surprise inflation number on the up side, may send some chill.
If it is below 8%, then PEAK inflation, front run to buy again. It has to remain around 8-9% in next 2 months to get instill some fear. Investors keep looking for ‘ANY” excuse to buy!
Still fighting
Still winning
Some people are getting 30 yr mortgage rates down to the high 3’s today. What! This is impossible as an individual to know how to navigate it all, when everything (prices, rates) are swinging so wildly from month to month and hour to hour.
The Fed needs an immediate .75% rate increase!
Tonight Bullard said regarding FED credibility: “That credibility didn’t exist in the earlier era,” he said. “We have a lot more credibility than we used to have.”
What a joker…have a look at the markets…