Wolf Richter on “This Week in Money,” by Howestreet.com
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Austrian economic theory explain that inflation produces boom which can not last forever. Stoping that inflation or reducing it will create bust.
Agree. If I had to pick a sect in the economics pseudo-science, I’d go with that one. Maybe Keynesian.
What was the problem with letting the pension fund suffer heavy losses. Worst case scenario is run on fund and bankruptcy. That will not have killed UK economy, but instead BoE interferes again with QE again ensuring hyperinflation and long term doom.
They will finally raise interest rates to 20% because nothing else will work. It will be too late. This is the day when “The started setting on British empire for a very long night”.
“What was the problem with letting the …”
One of the problems was contagion. The pension funds were selling assets left and right to meet margin calls, and this selling when buyers had evaporated caused prices to plunge and yields to spike even further — of otherwise good assets. The fear is that if this isn’t stopped, you can throw the whole financial system into a panic.
Exactly. Why not let them fail? If you rename “pension fund” to “high net worth investment vehicle” it becomes much harder to see why everybody who -doesn’t- have a fund is bailed in which yet another currency debasement. (Most in the UK are on the inadequate state pension)
Its like Biden’s student loan forgiveness idea, if the people that -went- to university don’t pay, it just means the people that didn’t go pay…
I think its because the fraud Bailey could see that there was going to be a cascade of selling gilts, plus people in his upper wealth circle would have lost money. I know Wolf Richter has pointed out contagion but it seems to me that this is starting to become overused and is a regressive transfer of wealth upwards.
If you know the UK, this isn’t unusual for a mundane fund of some kind like a local council, to suffer catastrophic bankrupting losses through leveraged gambling. London is full of smart talkers selling financial products. The British Empire was not won through war, but by involving sophisticated financial schemes to defraud locals i.e. Malaysian rubber etc.
Bailey is scared of gilt yields rising because as he does absolutely an inadequate amount of tightening there is extremely loose fiscal policy from the government. Remember UK house prices going up at 5% is the RELIGION of the UK for decades. If anything alters that, the government is voted out.
I look at this and I just shake my head its an almost casual debasement of the pound, unbelievable. To put it in numbers, Bailey, with domestic inflation at 10%, has just printed another 2000 pounds per worker (which would have been 3000 USD but clearly not now). 2K printed per worker!!! Some people only get 16K/year. Disgrace.
On the plus side it does give you forewarning of Japan, Italy, USA, christ knows whats lurking “when the tide goes out”.
Won’t a buyer come in when the price is fair? Why not return to a situation closer to free market price setting?
Jeffd
Yeah, $5 Tesla sounds fair to me.
Like Wolf said, the Fed rate going over 5% doesn’t seem needed to bring inflation downward at this point. We hope! But who knows, if the runaway train doesn’t slow and higher rates are needed next year it’s pretty well ballgame over for most.
People and governments need to stop blowing money. States giving out stimulus at this point is crazy.
Yes, there could be contagion and significant Asset price correction. However all assets are already in the “Funny Money ” territory. This “attachment” to funny money is causing developed capitalist economy to lose real money (goods and services).
BoE can keep boosting its funny money assets to keep funny balance sheets intact and keep making England poorer at the same time with real money.
I don’t realty care about England. I am criticizing BoE because this is the shit that other CB will be encouraged to follow. So we should call it for what it is.
> What was the problem with letting the pension fund suffer heavy losses.
I’ve heard a huge portion (some say 90 percent) of defined benefit funds in the UK faced failure. If so, can you imagine the result if, says, half the retirees in your city suddenly had zero income?
So moral hazard it according to Wolf’s logic. Wash, rinse, repeat. This will never end of too big to fail is repeated. I’m just trying to understand your logic Wolf. You can’t have it both ways.
Phleep, even if 90% of pension funds would collapse, a bankruptcy proceeding can still liquidate the companies managing these and the take remaining proceeds to compensate the retirees that were owed money. If there are still losses, government can directly compensate innocent retirees.
No need to bail out stupid fund managers and speculators at large with another QE.
@ Wolf –
Does not a buyer always step up to buy “otherwise good assets”,
at the right price?
Yes, mostly, but not always at a price that the seller can survive :-]
phleep said: ” can you imagine the result if, says, half the retirees in your city suddenly had zero income?”
————————————
you can save the pensioners without saving the pension fund.
welfare ……………..
the wrong entities and classes keep getting bailed out ,,, by design
Wolf said: “The fear is that if this isn’t stopped, you can throw the whole financial system into a panic.”
——————————————–
yet they’ve placed no restrictions on the pension fund’s gambling, and have placed no charges for mis-management ……….
I would argue that “setting the whole financial system into a panic” is what needs to happen. That might mean interest rates much, much higher. So what? Isnt that what needs to happen to clear out all of the financial imbalances?
I personally think that all of the excesses will only be properly wrung out of the system if the governments stop intervening completely.
Look at how much chaos has been created – and they have not even really got serious about liquidating all the debt they monetized!!!!!
So who is losing purchasing power with iinflation – the poor. Who is losing asset values with a plunge – the rich. So wouldnt a purge of the financial system just start the re-boot faster? and wouldnt it lead to a much more stable bottoming if the central banks were no longer perceived as propping up the markets?
I have heard, although I dont know any details. Havent there been many other financial crises that just worked themselves out normally in the past, without government intervention?
gametv,
There has been no “major” financial crisis in the lifetime of anyone reading this blog, not by my definition anyway.
Two differences with the past.
First, a lack of self-sufficiency by most of the population.
Second, hopelessly inflated expectations which don’t align with crashing living standards.
This is a combination for social unrest. It’s coming eventually, but part of the reason (presumably) for the recent “can king” exercise.
Make that “can kicking”
Wolf wrote: “How Far Will the Fed Go…”
LOL. Talk about a rhetorical question. The Fed will put the Brits to shame with how far they go……….once one (or several) of their owners get into financial difficulty of some sort.
Money is a drug, and these people are pitiful addicts. They only know how to leverage money to make more money, and they don’t know how to do anything else.
gametv, governments can’t avoid intervening — their role is to make and change the rules under which markets operate. By definition they are always intervening.
The people deserve to lose all their money for making stupid investments. How else are they going to learn? No one or no thing should ever be bailed out.
Trickle-down.
Sorry, but the economics (such as they are) are too much for my brain….total overload. Saw on Bloomberg Truss is going to reverse eliminating the top UK tax bracket…talking head consensus was that in the present situation it doesn’t look so good.
In other snark, Truss looks like she’s wearing a big one, or as we used to say about a mean and stupid supervisor, she wears her ass in front.
Desantis is now bussing immigrants in to help with the clean-up after Ian…..instead of to Martha’s Vineyard.
I don’t know if I’ll make it to Wed. South Park day, before I go bonkers. Too bad I quit drinking. It made me say dumb things.
Sorry, I should have known DeSantis wouldn’t leave himself personally open to such obvious irony. It’s what I get for listening to far left buddy, without checking. But the immigrants DO seem to be going there, nonetheless, and I’m sure more dirt cheap extra clean-up labor (with options to not pay them, of course) doesn’t bother him one bit. I doubt there is a sign like this in Martha’s Vineyard. Proof I’m not totally mad is below if Wolf allows link, otherwise Google NY the Post article it leads to. I’m still dumber when I drink, that you can take to the bank.
The real economy (Production of goods and services) is outside the financial economy and today that is collapsing with inflation and speculation.
The real economy must be rescued before financial one aka leveraged funds invested in Asset bubbles.
@ WA – good comments.
a couple of thoughts –
the real economy is based on work
the financial economy is based on theft
Wolf Richter
Oct 1, 2022 at 11:41 pm
“What was the problem with letting the …”
One of the problems was contagion. The pension funds were selling assets left and right to meet margin calls,
WHY IN WORLD WOULD PENSION FUND be using LEVERAGE
and have MARGIN calls
to me it sounds like RECKLESS financial wizardry
Yes, exactly. Why would a pension fund use leverage? Interest rate repression (yield repression) killed the classic model for pension funds, and so investment bankers came along and offered a complex derivative product that no one really understood and they said, here you go, that’ll solve your problem, and it sounded good, and the models worked for years, and everyone made money, most of all the investment bankers that sold this stuff, until it suddenly blew up. This is exactly what “finance” does, every time. And interest rate repression will go down in history as the most expensive monetary mistake ever.
Credit Suisse admitted in its 2021 Annual Report the Group holds financial instruments for which no prices are available and for which have few or no observable inputs (level 3). For these instruments, the determination of fair value requires subjective assessment and judgment depending on liquidity, pricing assumptions, the current economic and competitive environment and the risks affecting the specific instrument. In such circumstances, valuation is determined based on management’s own judgments about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
Who said anyone had to leave the nursery imagination world of make believe? Purple Paper toy value is determined based on children’s own judgements about the assumptions that nursery users would use purple toys first over other paper toys (including assumptions about risk of purple toys going out of fashion). Determination of fair value requires subjective assessment and judgment depending on swappsies at lunch time, funness assumptions, the current jealousy of other kids and the risks affecting the purple paper including a gust of wind blowing it away.
What these economic geniuses don’t understand is that the boom distorts the economy enormously, creating demand where in the absence of cheap currency there would be no demand. This means that trying to reverse policy and engineer a slow down is not going to work. You simply can’t save the pedestrian you just ran over, by shifting into reverse.
The answer as always is to take our money from the hands of bureaucrats and politicians. We need stable money which is currently gold, maybe crypto in the future. All fiat currency have collapsed for the same reasons. And every time the same lesson needs to be re-learned.
“We need stable money which is currently gold, maybe crypto in the future. All fiat currency have collapsed for the same reasons.”
What has collapsed is crypto.. Go have a look. Your hated fiat dollar is much higher.
I would love for people to quit spouting off this crypto scam BS.
BTW, there are something like 12,000 crpytos that aren’t traded anymore. If you hold one of those, you cannot do anything with them, you cannot buy anything with them, you cannot convert them into fiat or into anything else. You’ve become the end-user of a piece of worthless code in a worthless crypto scam. But someone made money off you selling you this BS scam. That’s the ultimate fate of all cryptos.
Peasants have stuck (been stuck with?) with the “Coin Of The Realm” for thousands of years. As a card carrying peasant, I certainly won’t be bucking that trend.
Invest in a good microphone please.
Sounded like Armstrong from the moon. Pretty cool. I mean “from the moon”.
Ghassan,
Skype-to-Telephone interview (me on Skype calling into a phone line). This is Howestreet’s recording.
If you want to listen to MY podcasts recorded by me with a “good microphone” where I control the settings, start here:
https://wolfstreet.com/2022/09/18/the-wolf-street-report-this-inflation-will-be-tough-to-get-under-control/
Maybe you should suggest Skype to skype or whatsapp to whatsapp to them because phone lines are ages behind internet calling, specially landlines.
This is going into the weeds, but back in the day, a voice call would be 1/24th of a T1 line or 64K. Today, with data compression and fiber, the call can be lower quality. An example is talking on a PBX, your bandwidth is whatever the PBX was programmed for. All the other pieces of software on the call could have their own compression programs.
Talked to a local doctors office a few days ago. Garbage call. Had to be her PBX.
I’ve suggested it a bunch of times. Sometimes we have a really bad connection. This time wasn’t bad. A couple of times we ended up having to redo the interview, which was a huge hassle. But Jim, the guy that is doing that, has decades of experience with radio, and so that’s how his tech is set up, for call-ins.
Kwazy Kwasi will be gone in two weeks. Truss is a bust and is toast, elections will be coming soon. The sad thing is their replacements will not matter nor will they change any thing. It will provide fodder for the un-employed to view on day time tely programs such as LBC while lying under piles of blankets to stay warm. They can heat their scones ( butter if they got it) in their laps and hot tea is way overrated. What changes between now and Oct 14 to reverse the Leveraged £1.5 T pension blow-up ?. Will the BOE new round of long dated bond buying with base-less Fiat fix it by Oct 14 ? Really? That would be fuc$ing Magic. Looks like a Fiat Ponzi Scheme and Mitch Feierstein statement that you can’t taper a Ponzi may be dead on. Couldn’t even start QT before “something broke” A lot of shit will need to be broken to undo decades of Rate repression and reckless monetary policy that was allowed by and enriched the political class on both sides of the Atlantic. Git er’ done, times a wasting.
It was the rate of change of gilt yields causing most gnashing of teeth.
That was caused by the pair of plonkers running the UK economy giving such news at such a time and in such a manner.
Had they released this news over weeks and months it’d have not been news.
An economic shock that you have full control over, isn’t an economic shock you should have to deal with… it’s a great one to trade though!
Increasingly I’m reading reports that Kwarteng and friends all knew this wouldn’t end well but it made an amazing FX trading opportunity.
Hmmmm.
Not even a single tiny fund goes bankrupt and BoE pivots over fear mongering.
It’s how it works statement. Markets drop and within two days it’s bailout time, dropping interest rates or both. Out of control inflation it’s being vigilant and interest rates that increase slower than the inflation rate that has a 8 % head start.
For the first time ever this week I purchased something from a shop and the price at the checkout was higher than the price on the shelf. I was told that the current price is only available at the checkout!!! This is the shitshow that the UK has now become.
The panic moment was baked into the cake when the bubbles were blown. There will now be a crisis, in most markets and in every nation, with a lot of discretionary judgment calls by leaders as to how to assign losses and/or stave off the worst. The judgment, values and priorities of those leaders are of paramount importance.
Hence I Strongly Disagree with “Their replacements will not matter nor will they change any thing.”
Except if you think all the choices across the political spectrum are equally bad in every nation, which I doubt.
Do Not Vote for the Banksters’ Pet Politicians
@ DR DOOM “Couldn’t even start QT before “something broke” A lot of shit will need to be broken to undo decades of Rate repression and reckless monetary policy”
————————————————-
Let’s get our thinking straight and kill this “they will raise interest or practice QT until “something breaks”. The bastards BROKE things a long time ago. The QE and interest rate was the breaking.
Gilt er’ done…
What is the ‘bullwhip effect’?
The term bullwhip effect was coined in 1961 by MIT computer scientist Jay Forrester in his seminal book “Industrial Dynamics.” It describes what happens when fluctuations in demand reverberate and amplify throughout the supply chain, leading to worsening problems and shortages. “Simply put inflation has dug in like a Alabama Tick”. U can call dogs Boys the hunt is over” I’m talking swinging Richard in this room.
Liz Truss met with the Queen and that didn’t turn out well. And then Truss put her attention to the British tax code and oh, my… Can we please just keep the PM somewhere she can’t do more harm?
She has human rights. They can put her in a dungeon. But they can’t afford to heat the dungeon. Economically it’s more win win to leave her out.
To the eastern front!
Thanks for posting this interview. I liked how you hedge your view of where the FFR is at, where it is heading and where it might go. Scary stuff for sure. Great to hear you interacting with these guys every couple of weeks.
Wolf, the link works but you have an extra “e” in “Howestreeet.com”.
Wolf:
You and yours don’t get it.
Its not your fault.
You and yours are just blinkered “of-and-in-the-markets” guys.
Again, its not your fault
No one should blame you, call you names, abuse you or attack you.
Here’s what you don’t get:
INFLATION IS CANCER for the Fed and the 100 million US households with annual gross incomes of less than $75,000
UNANCHORED INFLATION EXPECTATION is metastasised cancer.
THE FED IS CUTTING OUT THE CANCER THAT IS KILLING OUR FELLOW CITIZENS.
The likely and transitory 7% terminal rate and 7.5% unemployment rate are a small price to pay for the welfare of the 100 million households who are not in and of the markets.
FOR THE FED YOU and YOURS are EXPENDABLE STATIC
A lot of under 75k that are in families live off gov, i see it all the time at walmart
a lot of under 75k are in families that work themselves hard.
it would be interesting to know what % of families under 75K and over 75K benefit from the government dole and how much. A lot of people make a good living off of “workfare” from the government.
Harold Quinter said: “THE FED IS CUTTING OUT THE CANCER THAT IS KILLING OUR FELLOW CITIZENS.”
——————————————
The FED is the cancer.
Dude, Wolf has been saying exactly that for quite some time here.
Yes, I figured someone is going to point that out so I wouldn’t have to :-]
I guess a R ALL TGDFA ‘s is appropriate here. Thanks for sharing all your great work with us Wolf.
Harold Quinter has the picture inside out.
You two do not say the same thing.
Harold seems to think the actions of the FED is to save the welfare of the 100 million households not in the markets.
The actions of the FED are to save themselves and their masters, always.
This is the United States. People can and will blame you, call you names, abuse you and attack you for having any opinion whatsoever that differs from theirs. And that’s good.
It’s far better for a nation to air those debates and disagreements, instead of a tiny elite making all the decisions without discussion or consequences.
That tradition has been constitutionally protected for about 230 years. Don’t allow any person or organization to stop it!
Also, I had a doubt. Why the beer mug? why can’t we print t-shirts with funny words
1. Inflation is transitory
2. Trickle down economics
3. There will be no recession in our life time
4. Money printing will not cause recession
5. Pension funds are safe
6. Buy the f dip
My mug will outlast my laundry.
It will probably outlast me.
It just may outlast the next few owners.
I do agree that tee shirts are fun.
TINA 2 FOMO
Kami Kwase version of the T
1. It’s just the city boys playing fast and loose
2. I’m always calm
3. Great day for freedom
etc etc
Love the idea… I think I may print a few for me and some friends…
I like:
1. Inflation Is Transitory
followed by either
2. Don’t Fight The Fed
OR….
BTFD…. The Fed is Going To Pivot :-)
CNBC article:
“‘The Fed is breaking things’ – Here’s what has Wall Street on edge as risks rise around the world. … Surging volatility in … world’s safest fixed income instruments (Treasuries) could disrupt the financial system’s plumbing, according to Mark Connors, former Credit Suisse global head of risk advisory …
forcing Fed to prop up the Treasury market … will likely force the Fed to put a halt to its quantitative tightening program ahead of schedule.”;
So people should deal with very high inflation in order to save the financial system “plumbing”?
“The other worry is that the whipsawing markets will expose the weak hands among asset managers, hedge funds and other players who may have been overleveraged or took on unwise risks. Margin calls and forced liquidations could further roil markets.”
So margin calls and forced liquidation of incompetent greedy speculators is a bad thing?
> in order to save the financial system “plumbing”?
How would you do without plumbing? Or let’s say, a functioning bloodstream?
… even if a bloodstream is polluted with, say, steroids or heroin, due to past abuse, it is still hard to do without it.
First, he should clearly define what this so-called “plumbing” is. Then people can decide whether it is a destructive smoke and mirrors show, and needs “disrupting.”
Or, just trust his great expertise?
Nah, the plumbing will still be there. But prices will be a lot lower. That’s not the end of the world for most people, but for some of the highly leveraged folks on Wall Street, it might be a little rough.
The biggest thing that has ALREADY broken is price stability (inflation).
“The biggest thing that has ALREADY broken is price stability (inflation).”
——————————————–
that’s after the fact. The breaking is and was excessive dollar creation and interest rate suppression.
and prices have been rising for years, just not in the bullshit manipulated inflation tracking tool that the FED likes to point at.
Asset Prices, education, healthcare, candy bars, etc. Continuous price increases
If the Fed is really worried that inflation is now WAY more persistent than they expected, they need to go 75 basis points in Nov, then be very clear with everyone that they’re willing to go quickly to 5% by January. Also, they have to signal either a willingness to go higher if necessary or keep the FFR at 5% until the job is clearly done which could be most of 2023. In other words, NO PIVOT. 5% should be enough so long as the Fed is willing to continue running off its balance sheet through mid 2024.
I read an article the other day where a CEO said that companies love inflation. It gives them justification to raise prices more than is necessary. So my take away is the Fed must make the cost to borrow money for corporations much higher, be willing to leave it there long enough to ensure prices reflect real input costs, rather than chasing profits. As always, need to pay attention to corporate profits over the next 6-9 months.
The FRB is ultimately no different than any other central bank, just with a bigger and usually wealthier economy to impoverish. Samer “tools” as any other and no “wizards” behind the curtain either.
Financial and economic distortions have been accumulating at an accelerating pace since the 1987 Crash.
Since I know that central banks and governments will persist, it’s ultimately going to resolve in a “fat tail” catastrophic systemic failure with much harsher economic consequences for (practically) everyone.
Ft Myers FL will never look the same. It will be rebuilt : shingle roof and
paper walls houses flying in the wind will be out.
Rebuilding will be done per what insurance will pay out. More shingle roofs and paper walls for the next storm to destroy.
Would add, “What the insurance will pay out before bankruptcy”. Not sure where I read it, but this hurricane is supposed to bankruptcy a bunch of those insurance companies.
Insurance companies have been functioning in hurricane alley for along time. Every once in awhile they take a big hit. They have reinsurance (in effect another level of insurance for an insurer), catastrophe bonds and other backstops. But I don’t know if they will write new policies, and at what price.
Inflation doesn’t help. My auto insurance went up crazily, and I am the safest, lowest mileage guy in the world.
Same thing reportedly happened in 1992 after Hurricane Andrew but don’t know if it is true.
Pays to pay attention to the solvency of your insurance company, especially for long-term contracts like annuities.
I have never attempted to investigate, but always wondered how life insurance companies could make good on previously underwritten policies at much higher rates under extended ZIRP.
They reinsure as a cost of doing business. After denying claims based on all the damage being due to water and not any damage as a result of wind, and getting hammered by the state insurance commissioners for doing so the big US companies stopped writing homeowners policies on the Mississippi Gulf Coast after Katrina. Their agents and adjusters kept a low profile for a while. Having the feds subsidize the flood coverage with taxes while private insurers sell wind policies is bound to create discord and cheating. Wind pool coverage is another artificially priced basket of cobras. Live where the hell you want and shoulder the potential consequences.
In the past year here there’s been lots of beachfront building, big expensive houses, they must have found insurance somewhere. Allianz reportedly took a big reinsurance hit after Katrina and Sandy. The bill for Ian’s visit will probably set records, because they all do now.
Historical flood/storm surge/windspeed statistics are lulling people into a false sense of security. Some of them don’t survive in places that withstood the worst storm previously imaginable. The psychological effects of the aftermath and the scale of the destruction are simply brutal to the survivors. I don’t begrudge them any help they may receive from any source.
Coastal communities are definitely cracking down on the scammers who chase storms, requiring licensing and bonds to be posted and seizing equipment and assets for noncompliance. I think Florida will set modern standards for recovery and rebuilding after this hurricane that will serve as a model for other states’ disaster response in the future. If the feds don’t f—- it up for them.
Six property insurers in FL had already gone bankrupt in 2022 as of September 26: FedNat, Southern Fidelity Insurance Co., Weston Property and Casualty Insurance Co.; Lighthouse Property Insurance Corp., Avatar Property & Casualty Insurance Co. and St. Johns Insurance Co. FL has a state backed insurer of last resort called Citizens Property Insurance Corp. and when property insurers become insolvent, the non-profit Florida Insurance Guaranty Association typically steps in to pay claims.
“ I have never attempted to investigate, but always wondered how life insurance companies could make good on previously underwritten policies at much higher rates under extended ZIRP.” – possibly the same way British pension funds did. Tides going out, we’ll soon find out who’s skinny dipping.
I see a pattern here. Lots of commenters say “let them fail,” and a finance purist would say, “have reserves, diversification and insurance in place beforehand.” But the world is full of hazards and catastrophes and if they fall on you, uninsured (or underinsured, whatever), my money says, every tough guy commenter here will be in line for insurance after the fact., also known as government bailout. This is as true for AIG (financial storm) as for British pensions, and any other thing not well foreseen and politically impossible to tax (or charge premiums) to a level of reasonable insurance in advance. Government is everyday dragged into the middle of this by all these supposed purists whose ox is being gored, this time.
On wednesday the The Bank of England stated
“the Bank of England stands ready to restore market functioning”
But if you think about it, what it is really doing is preventing the market from functioning.
Remember, market forces are stronger than any government or central bank. They have no power to alter the workings of the free market over the long term. They can and do interfere but in the end the market always reasserts itself dramatically. This has often led to the ruin of entire nations, their currency and their economy.
Buckle up, because the market is just about to show who’s boss.
If the world and markets REALLY gets fair, if prices really fall until they clear, are you ready for that? Do you have the guns and prepper stuff in place to fight hordes of starving idiots? We are three meals away from that. Aka anarchy.
The moment of truth is upon us. Credit Suisse is rumoured to be on verge of collapse. The Financial Times reported that the bank spent the weekend calling its large clients and counterparties to reassure them.
When they have to make an effort to issue public denials, you know the accusations have some validity.
If the accusations were clearly baseless, people would just laugh.
> They have no power to alter the workings of the free market over the long term.
I don’t know, is almost 40 years straight (until recently) “long term”? And these folks are merely paused right now, with a thumb at the ready to put back on the scale, whenever that may be. The world changed with modern central banking, as much as with electrification or the Internet.
There is never something for nothing and no, it’s not different this time. Don’t confuse the biggest asset, credit, and debt mania in the history of human civilization as some kind of “new normal”. That’s what we have had, the entire 21st century.
It will be hazardous to your financial health.
Maybe in a textbook; in the real world politics never goes away.
The rebound in R-gDp is due to the reversal of money flows. The demand for money has fallen, while the means-of-payment money has risen. It is likely to force the FED to tighten faster than expected.
Link: George Garvey:
Deposit Velocity and Its Significance (stlouisfed.org)
“Obviously, velocity of total deposits, including time deposits, is considerably lower than that computed for demand deposits alone. The precise difference between the two sets of ratios would depend on the relative share of time deposits in the total as well as on the respective turnover rates of the two types of deposits.”
But Powell sums up all deposits together and claims M2 is worthless: “We have had big growth of monetary aggregates at various times without inflation, so something we have to unlearn.”
So, Wolf, in the interview you said that if short term rates go to 6% or 7%, we would most likely see double-digit long-term rates.
How about if it stays at 5%?
(unabashed self-interest: if long-term rates go to 8% or 9%, my retirement starts looking very comfortable indeed)
With a normal yield curve, the 10-year yield might be around 200 basis points higher than the short-term yields, and the 30-year fixed mortgage rate might be 100-200 basis points higher than the 10-year. So with 5% short-term yield over several or many years, we might get a 10-year yield somewhere in the 7% range, and mortgage rates in the 8%-9% range. So that would be a lot, and right now my thinking is that the Fed will not have to go over 5% to get inflation under control. 4.5% might do as well. These 7%+ long-term rates are very high, compared to where they were, and they will change a lot of things … think about corporate debt: this will cause a lot of upheaval, which tends to bring down demand and thereby inflation.
The second part of that thought is that if these rates actually work in bringing down inflation to the 2% core PCE range, then the Fed will likely cut rates some, and rates won’t stay that high for very long. That’s the hoped-for scenario.
However, if it doesn’t work, that’s when the economy will have a real problem with inflation. And this could happen.
But, but but…, if everyone believes that inflation will go down “next” year, and that the Fed will then cut rates again, long-term rates will NOT go up, and inflation will likely NOT decline back into the range, and the whole thing drags out. It may take years of frustrated bond-market moves and waves of unanticipated inflation before you get a 9% 30-year Treasury bond yield. You will only get them when markets come to believe that inflation will stay high for decades and NO ONE – not even you — wants to touch a 30-year bond.
So this is all very complex.
Depends upon the time frame. No market moves in a straight line. So, I’m expecting that longer term rates (like mortgages) might not be substantially different than now in a year or two. There has to be a meaningful bond rally eventually.
Years from now (starting later this decade), I’m sticking with the expectation that rates are destined to “blow out” and it doesn’t matter what the Fed does or doesn’t do. The DXY should have peaked by then and won’t be rising to help offset any future QE or cuts to the FFR.
Why is there any expectation that QE should ever come back? This was supposed to be an emergency measure not a permanent tool for policy makers! QE will forever be inflationary and should never be used again.
Historically, the markets bounce when R-gDp rises.
news.com.au: Fears Credit Suisse is on the brink of collapse
One of the world’s biggest banks insists it is in a “strong” financial position, amid fears of a looming Lehman Brothers moment that could spark a major crisis.
Credit Suisse is scrambling to reassure investors and clients about its liquidity and capital position as rumours swirl that the major global investment bank is on the verge of collapse.
The troubled Swiss lender — which has seen its share price plunge by 60 per cent over the past year to a near record low, following a string of scandals and losses — saw a sharp rise in the spreads on its credit default swaps on Friday, sparking fevered online speculation.
Credit default swaps offer protection against a company defaulting on its bonds.
The rapid rise last week of around 15 per cent, to levels last seen in 2009 during the financial crisis, suggested investors were worried about Credit Suisse’s financial health.
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Meanwhile Deutsche Bank, which has seen its share price plunge 40 per cent over the past year, is also rumoured to be in trouble, with its credit default swaps also rising in recent days as analysts raise similar questions about the German bank’s financial health.
Both Credit Suisse and Deutsche Bank are deemed global systemically important banks (G-SIBs), or “too big to fail”, meaning both would likely be subject to government bailouts.
SNB never should have bailed out UBS and CS during the GFC. Any bailout should have been limited to the core domestic bank, leaving all other parts to sink.
Not a complaint about Wolf… The Canadian guy in the podcast said “High interest hurts everyone.” Simply false. Debt-free people and debt-free companies are not the majority, but they are VERY common. Far more common than the media wants us to think.
A few years ago I ended up on a local home builder’s email list. Yesterday, they emailed out options trying to temp people back in. Not much movement on prices though.
• Closing Costs Assistance ( Up to $10k)
• Permanent Rate Buydown
• 2-1 Temporary Rate Buydown
• Arm Loan
• No PMI or MP Expenses
• Use Towards Upgrades
So Crude Oil futures are up 4% and if the trend is higher so much for the Fed fighting inflation as fuel goes higher again.