The economy would muddle through, but in the markets, all heck would break loose. Here’s why.
By Wolf Richter for WOLF STREET.
The issue is this: Since April 2022, the Fed has hiked its policy interest rates by 450 basis points, but consumer price inflation as measured by the “core” PCE price index – which excludes volatile food and energy products – has been moving up and down in the same high range without much visible improvement.
The core PCE price index, the Fed’s favored inflation index for its 2% inflation target, was at 4.6% in February, according to the latest release, roughly the same as in July 2022. “Core” CPI, which has been running at about 5.5% for months, actually accelerated in March.
So now there are voices – voices with big megaphones – that say that the Fed will and should change its inflation target because this inflation will not go back to 2% without a lot of economic damage, and to get that kind of economic damage, interest rates would have to rise much further, and neither the Fed nor the White House nor Congress is willing to go there.
Americans can live with 4% to 5% core PCE inflation just fine, they say. And once everyone gets used to it, it’ll vanish off the headlines, they say.
And so these voices say through their big megaphones that the Fed will abandon its efforts to push inflation down to 2%, and that it will therefore pivot, and that yields will fall and markets will therefore explode higher or whatever.
Oh really? What does acceptance of 4%-5% inflation mean for yields and asset prices? We probably don’t want to find out.
But let’s play along with it for a moment to see where this will go. Let’s assume that the Fed will actually do this, that it will say, ok, fine with us, we went as far as we’re going to go with interest rates, and 4% to 5% core PCE inflation is acceptable even over the longer term, and we’ll just closely monitor how this develops, etc. etc.
It would completely annihilate the current dream that inflation will revert to 2% by the end of 2023, or at the latest by the end of 2024.
Short-term rates are going to stay high for a long time. At 4% to 5% core PCE inflation, the Fed won’t cut short-term rates by much if at all, even if it accepts this high inflation as the new normal.
Long-term yields will explode. Long-term yields are what really matter for asset prices. They are a bet on long-term inflation. This dream of inflation reverting to 2% in short order is part of what keeps long-term Treasury yields so low. The 10-year Treasury yield is currently at about 3.5%, well below the rate of inflation. Investors buying a 10-year maturity at 3.5% are confidently betting that inflation will revert to 2% shortly.
And if bond markets – including the Treasury market, good grief! – are told by the Fed that core PCE inflation will be 4% to 5% and that core CPI will be at 5% to 6% for years to come, and that everyone will get used to it, and that the Fed will be happy with it, and won’t do anything about it, then the 10-year yield will spike to 6% or 7% to be above this long-tern new normal.
And mortgage rates will blow out. With the 10-year yield spiking to 6% or 7% in response to this much higher than expected inflation, the average 30-year fixed mortgage rate will spike to somewhere between 7% and 9%. And stay there.
Higher yields = lower asset prices.
The whole entire logic for low yields in the markets was based on low inflation rates. Core PCE was below the Fed’s 2% target for most of the 13 years between 2008 and 2021. And when it exceeded the Fed’s target for brief periods, it was only by a hair.
The entire QE philosophy since 2008 was based on low inflation, and on the now crushed theory that QE won’t trigger and fuel inflation.
There was confidence in the markets that inflation would not take off, and if it took off for some silly reason, that if would go back below 2% in short order without the Fed having to do much.
All of that is now out the window. Core PCE has been over the Fed’s inflation target since March 2021, and it has been over double the Fed’s inflation target since October 2021.
Right now, the entire market psychology is based on the hope that inflation will be back at 2% by the end of this year or no later than the end of next year. So if the Fed says, “Forget the 2%, if inflation stays at 4% to 5%, and doesn’t get a whole lot worse, that’s fine with us” – well, that would be a rude awakening for markets betting on 2% inflation.
With long-term bond yields spiking to account for that higher inflation rate, bond prices would fall. Commercial real estate prices would fall further, and by a lot, home prices would spiral down. And stocks would take a big hit.
So is that what these folks with the big megaphones really want when they’re calling for, or expecting, the Fed to abolish its fight with inflation and just accept much higher inflation for much longer?
The economy can muddle through higher inflation and higher long-term interest rates as it has done before, with rising wages to meet at least a big part of those surging prices. But asset prices will not be able to muddle through with these types of long-term interest rates.
So folks that are clamoring for the Fed to just accept 4% to 5% core PCE inflation need to be careful what they wish for.
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I think the 30-year mortgage would level off around 9-10%. Residential prices would drop 20-40% to adjust. Millions underwater, massive foreclosure pile-up. Goodbye housing market. All that CRE needing to be re-financed in 2025-26 (several trillion) would also cause massive defaults as well.
I’ll be totally honest with you: with these frothy, nosebleed-level valuations and their underlying economic fundamentals all out of whack, this probably is good for asset valuations. Let market forces get back to doing their work: price discovery.
The folks with big microphones are not only calling for higher inflation targets.
1. They want free money back. They want Fed to artificially lower rates through treasury and bond purchases.
2. They want Fed to create new tools to buy and support Banks and CMBS.
3. They want Fed to start QE again so that 1% can get richer with the free money blitz.
4. They want more for 1% and less for 99% in this zero some game of market manipulation.
1. All this because till now there has been no political repercussions of high inflation screwing the 99%.
2. So now they think that the 99% are far more stupid and can be screwed more.
Also, keep in mind that we’re now into structural annual deficits of at least $1.5T per year with $2T being very possible. In fact, were at $1.1T for FY 2023 just through the first six months.
And what’s really scary is that’s up from $722B in just March alone.
With such large deficits, imagine how much inflation all of this PROFUSE federal spending is creating? So with such large deficits, is anyone surprised that we have zero chance of core PCE inflation retreating back to 2% anytime soon?
And imagine the mother of all recessions that would ensue if / when Uncle Sam is forced to balance the budget every year?
So forget about everything else, because the federal government all by itself (i.e., no FED QE) will ensure we have raging inflation for years to come.
These days, the 99% do not have much of a political voice. Sadly, casting a ballot isn’t going to change anything. So stupid is probably not the word I would use.
Well Leo that is what the silly people sitting in the White House might believe and it is likely what the likes of Mosler and Reich think as well. Best way I can think of to generate a host of auction failures in the various fixed income buckets from treasuries all the way down to high yield. Then the Fed would be forced to saying they are buying it all. Where it ends is everyone gets issued their little tin cup that they get to hold onto at the side of the street begging for anything. There is no way to stop economic pain after making a lot of mistakes. You cannot have perpetual motion. Woe betide me, there is entropy everywhere. We discovered during the financial crisis that there really wasn’t any money. Just a ton of leverage. Well now it’s even worse and if we don’t fix it now we’re done like dinner. The funny thing is all the agency issues that plague the system. The biggest one being the entire Chicago School group of economic druids because if this blows up their ilk will no longer get invitations to cocktail parties and fancy dinners for a very very long time. I suspect they would willingly throw everyone under the bus rather than let that catastrophe unfold.
I just got whacked by contractor(bid good for 1 week)
went up 13% and laughed at me and basically said I’m lowest take it or leave it
at least it’s a tax deduction
This is the inflation in services that I’ve been yelling about for a long time. Also see the comments here on how much it costs to get your hair cut, pay for child care, etc. All this is services inflation. And it’s raging.
I’m a contractor, all I can say is we’re all just trying to keep up. I’m booked out a year and just found a halfway decent part time helper that I’m paying $18/hr with zero experience. Had to explain to him that two quarters is a half the first day…. Raised my prices twice last year and I’ll have to again this year. My business insurance went up over 25% this year, material is up across the board. Don’t beat up on us just trying to navigate these waters.
Got hit by multiple issues on the home front this year…. water heater went out in Feb. A prominent local contractor wanted 3K to put a new one in… Did some research, and was able to get it all done (purchase and install new unit, haul away old unit) for 1.2k. A/C went out at the end of March. 3 prominent contractors wanted in the range of 15-20K for a 2 stage 15 seer unit. Was able to snag a 5 ton 15 seer variable speed unit for 10k. In both cases a smaller outfit was able to provide decent pricing as well as good service.
I think companies with too much overhead are going to make things worse by trying to squeeze consumers for all they can. And they are going to implode once consumers wake up to that fact.
Underwater but a lot of those houses were financed at 3-4% and with the dollar losing steam there monthly payment is locked in so that’s not gonna force a lot of foreclosures. People will be pissed off and stuck in their homes but that’s all,, still manageable if you bought in 2021 or earlier
I agree. And there are a lot more people who bought homes in 2021 or earlier than those who bought afterwards. Many of those who bought after 2021 are responsible for bidding up home prices and I will have a hard time feeling sorry for them if they become underwater in their mortgages.
Alot of refinancing!
or people just take over the existing mortgage from owner
in that way you get the lower payment via 3.75% mortgage
and in 5 years the principal paydown will make it viable
it’s how to walk into new better property
but at 3% its hard to go underwater
People won’t sell unless they are forced to for multitude of reasons
Correct. This is a forced selling environment. And Steve is right that layoffs are the missing link thus far. Not only the recent highly publicized tech layoffs, but layoffs that hit closer to home for more industries.
Sad to think that people losing their jobs is what is may take to establish some equilibrium in the RE market. But I don’t see an alternative now. The economy was just too severely overstimulated. A hangover must ensue from such a wild party.
….just imagine all the relocation hype on TV in recent years! so many “allegedly” moved to Florida, and then they find they’re stuck for life (no more moving) in gator country with knee deep storm water flooding!
Actually for Kiers:
U are SO right K, it begs the imagination:::
Folks really need to know that all or almost all the land left in the peninsula of the flower state is going to FLOOD with the regular rain/thunderstorms,,, and not just the 100 year or 500 year or ”whatever” year ”events.”
FEMA absolutely screwed the pup when they started to ”back up” any and all mortgages in the vast and certainly clearly floodable areas of FL that do and always have done flood…
This from one working in construction in FL since the early 1950s,, when only rich folks and fisherfolks built on the sandbars then and now known as barrier islands…
Rich folks paid cash,,, fisherfolks built a ”tar paper” shack cheap,,, both because they knew clearly EVERYTHING built on any and every sand bar would be washed away in the next storm.
Paying a 3-4% mortgage rate doesn’t make much sense when the underlying asset is declining. Better to sell early and lock your gains, unless you are willing to risk evaporation of those gains. Staying put is a risky bet most people don’t realize they are making.
You have to live somewhere.
It makes perfect sense too stay where you are when rents have increased 40%-50% and mortgage rates are 9%.
Moreover housing is a nice hedge against hyperinflation.
Yes. People forget that RE prices are not up because of people buying their one home to live in. RE prices are up because of investments. As in the GFR, the investor population will be the ones with the highest percentage of people who walk away.
And go where
Sell the house and go where?
You rent. The buy-to-rent ratio is off the charts now; its heavily skewed towards renting. It makes much better sense to rent and let the landlords worry about the price decline.
Anybody who says rents are up 40-50% isn’t using their brain. They are looking for rationalizations to lose money. I live on the West Coast. Home rentals are up only 10% in three years in my neighborhood.
Moving is not for everybody, I know. But inability to move is a liability in fast moving RE markets.
Location Location Location is not ”just” a realtor meme bobber:
We were really and truly blessed to come back to the saintly party of the TPA bay area in 2015 just in time to BUY FOR CASH in spite of the VAST rise since the bottom of that local RE mkt that HAD been down much more in ’13 and ’14 when I started watching daily because WE, in this case the family WE HAD to go there to take care of very elderly parents.
RENTS in the hood we were able to buy into were $600-700; now the least seen recently and now occupied has been $1795-1895.
Houses here are now at least 3x; most, if any updates, are 4-5 what they were in 2015, and when being walked by the ultimate boss, ( a fem Tibetan Spaniel type canine,) we see every local place go into contract within a couple days.
Reading the local zestimates, it appears that ”tearer downers” are going for the value/price of the dirt,,, otherwise, older houses going for $300 or so, and the fully updated ones for close to $400.
absolutely agree with you because the seller can ask for any price he just won’t sell but the landlord can’t ask as much as he wants because rents are tied to wages and when people don’t have money they can’t rent. Either they will leave the city, as is already happening in Toronto, or they will look for a small apartment for less money, or they will start renting, as in London, several families in one house. And the property with the inflated rent will remain empty, which is a loss for the owner. It’s this disparity between rents and prices that confirms the existence of a bubble, and this situation does not speak of stability in the prices of properties for sale
The best financial play now is to sell a home to lock in the quick gains of the past decade. I often hear people ask, then what? Where do we live? It’s true…rents are up and mortgage rates are up. But that is absolutely no reason to avoid locking in gains.
Remember this. You only have to rent for a few years to avoid the potentially huge price declines ahead. In three years, you might overpay a little in rent, relative to the past, but that extra rent is tiny compared to the quick, potential losses on housing. The downward trend is firmly established and has a long way to go. Thinking you can’t sell because you’d have to buy another overpriced home or rent forever is a pure rationalization.
Also, in three years you would qualify as a first-time home-buyer in the eyes of the federal government. This means you’ll qualify for a low down-payment subsidized mortgage with walk-away potential down the road, plus any new programs that pop up to support the housing market AFTER a crash.
That is extremely poor advice in high inflationary times Bobber. Anyone taking your advice in the 1970’s would have faired very poorly.
Yeah the US median rent is only up about 15% since 2020 last I checked, but it’s also worth noting that the US median individual income has barely gone up that much since 2000. In those 23 years, the median rent has roughly doubled and the median home price has roughly tripled. Crazy stuff out there.
Vintage V Net,love your comment ,this was spoken in the Bible no truer words
I agree with you if are treating a house as a short term investment.
Historically trying to time the market and cash out and sell your primary home and then rent while waiting for a housing market bottom has been very difficult. Rents will increase if inflation is high while you are waiting for houses to fall. I think you may need a crystal ball to determine the break even point/date. There is at least a 6% penalty to sell and move to a rental, and there may be a much higher mortgage interest rate penalty to buy back into the market if rates stay higher than the historic 7.5% average. I believe there is high risk of long term losses countering any short term gains.
If it is your primary home, the housing prices have never lost value over a 12-15 year period. A house is a long term investment.
You could loosely compare this to holding MBS’s or long term treasuries. Over time, these will pay out in full. The Fed and smart banks are avoiding dumping these even though they aren’t paying going short term rates and are worth less if sold. This is because they are long term investments, just like a primary home.
I will ride the roller coaster again just like I have done for the last 35 years. I have a better seat now with a sub 3% loan. Compared to 1995 when I purchased my current house, it has been a great long term home and investment. Anyone who purchased in 2006 at the last HB1 peak is doing very well now even with low average inflation. I think anyone who holds now for 15 years will agree in 2038 especially if inflation continues to be high.
Owning a primary home is an inflation hedge for the long term since it is a place to live.
Someone with a 3ish% mortgage who didn’t overpay by buying at the peak, will almost certainly pay more to rent the same type of property if they sold & signed a lease today.
Anyone who bought a home for a long term place to live doesn’t care about their “underlying asset decling” because it still provides the same value – a roof over their head.
You’re forgetting that many (most?) Americans live without a lot of cushion. Many people, if they got laid off, would run out of money for mortgage payments within 6 months, at best.
Einhal they won’t walk away ,just stay and quit making payments.For 2 years
Until the foreclosure process starts (assuming there isn’t a moratorium).
There all in mbs who really owns them ,what a mess
Though a lot of those pre-2021 buyers hoping to be “stuck in their homes” would be laid off or lose their homes for other reasons (ex. thru divorce with all the extra stress) and wind up having to sell anyway. There’s nothing good about persistent inflation that high, and even homebuyers at the lower interest rates wouldn’t be safe from the fallout from it.
the new media keeps talking about short term rates set by the fed. but as wolf says the long term rates are what would tank the economy and asset prices.
and noone really talks about whether the Fed will ever be able to reduce the balance sheet without a meltdown
I disagree. Even if the mortgage rate did level off, with 4-5% annual inflation there would be even less incentive to sell a residence as it would be a set hedge against that inflation. At 5% inflation your dollar loses half it’s value in 10 years. People won’t sell the place they live in for half of what they paid for it, not with the added cost of upkeep and taxes thrown in. Real estate would get even more expensive, and anyone who couldn’t find a job with a minimum cost of living increase annually would be even less likely to ever be able to afford a home.
Spot on commentary
Agree. Very timely and relevant.
Improvidence of a 4% target would be staggering.
Should aim for a 0.2% target if not just getting rid of that cancer of an institution.
“Should aim for a 0.2% target”
Yes, this. There’s nothing economically sound or having any sense about the 2 percent target. Absolutely nothing. Read the history of the magical “2 percent inflation target”–it was literally just a made-up number by a small group of New Zealand central bankers who had been procrastinating and were late to a meeting, and needed something to give a speech. They admitted that they just made up the idea of the 2 percent target straight out of thin air, without any economic rhyme or reason. At all. Sound money principles have called for price stability, at something more around a 0.2% target. That’s been the case even since Adam Smith and Paul Volcker had this in mind when he saved the world economy 40 years ago. That’s what we should be returning to. It’s also a pipe dream to think the USD can hold on as a reserve currency if its value keeps inflating away. The whole point of a reserve currency is to serve as a somewhat stable holder of value even as other assets and stores of value are less anchored, and if the US dollar is allowed to just inflate then it becomes useless for the most basic purpose a currency is to serve. I agree with a lot of people that it would actually be a good thing for the dollar to be less of a reserve currency as that would rebalance things and allow us to export things and rebuild manufacturing, but not if it happens through reckless inflation. That’s a formula for societal collapse and the United States itself coming apart at the seams, especially as polarized as things already are.
“…but, but, we’re EXCEPTIONAL!…(…aren’t we?)”.
may we all find a better day.
It was magical enough to be taught in a top twenty Econ grad program back in the 1970s. They probably still believe that today.
Wolfman, Wolfman, Wolfman…. YEP, explains the insanity to the sane.
With THAT comment ,,, far damn shore Bubba:
When first going to G.Danz and sons in downtown SF, the first thing the oculist said in response to my sorrow was:
”There are none SO blind as they who will not see.”
The banks are reporting higher profits from earning high interests while paying meager interests to depositors.
Depositors need to get smarter with their money to not get screwed by banks. I moved money to 13 week TBills through treasurydirect.gov. It now earns good returns and also gives me flexibility to adjust based on market changes as its only 13 weeks.
No bank CDs in my area pays as much return on a 13 week investment as TBills.
Treasury Secretary Yellen, an esteemed San Francisco economist (although born in the BK), expressed her professional opinion that with these current bank failures, US banks will tighten and do the Fed’s work for them…and so Fed should relax.
Hard to argue with a brilliant economist😁😁😁…PJS
I believe the Fed behind the scenes has already caved into the 4% to 5% inflation target rate as being the best they can achieve without wrecking the economy, especially going into an election year. They just haven’t told anybody. Anyway, why would anyone believe anything coming out of their mouths? They talk out of two sides of their mouths and lie out of both sides at the same time.
As wolf mentioned in the article, at a 3.5% yield on the 10-year, the market most certainly, and emphatically believes what the Fed is saying when it comes to the inflation target.
plus 1,000 percent to Swamp Creature’s comment …. ” They just haven’t told anybody”
“They talk out of two sides of their mouths and lie out of both sides at the same time.”
How could anybody not know this ?
Or not know Volcker had to take the Fed Funds rate in 1982 to 16% ?
Fed chairmen Paul Volcker had to take the Fed rate to 20^
“I believe the Fed behind the scenes has already caved into the 4% to 5% inflation target rate as being the best they can achieve without wrecking the economy, especially going into an election year.”
I feel like an ongoing 4% to 5% inflation rate would be a much worse election albatross than a recession. A recession can be deep and difficult but it’s temporary, and then it’s over and the economy recovers. Ongoing, persistent inflation is painful and angers hundreds of millions of people who quickly find that everything is becoming unaffordable. If anything we need not only a return to 1-2% inflation, but at least a short period of deflation to get prices back to a manageable level, esp for rent and housing. Even though too many economists have tried to gaslight the public into thinking deflation is a dirty word, that’s only if it’s persistent and goes way beyond a previous stable level–especially if incomes are stagnant (which they absolutely are), then a short-term period of deflation is a good thing to get prices back to affordability.
Yes, I think of all prices in light of the excess we just lived through, especially RE and financial assets. Most of my friends are anchored to higher prices that are a product of an insane bubble. They see asset price reductions as losses, whereas I see it as an absurd froth blowing off, as it should.
I am marking my personal balance sheets to what I believe is realistic. I might be pleasantly surprised, or not.
I really disagree with this statement. The Fed might even realize it needs to overshoot to zero percent inflation before it really crushes inflation. I am sure the chart of inflation from the 70’s, when it dropped and then bounced higher, is seared into the collective conscious at the Fed. The Fed is smart enough to realize that the longer it waits, the worse inflation will get.
If you look back to 2018, when the market started tanking because of the QT they were performing, that was done when there was no recent inflation. This time around they have alot more balance sheet to sell off. Five years of selling balance sheet assets should be expected. There will not be a pivot back to heavy use of QE. The lesson has been learned.
I think zero percent inflation = massive social unrest. And it means an easy tip into a deflationary crisis. We are well aware how things can overshoot. Central banking is like steering a battleship with wet spaghetti as control levers.
“zero percent inflation = massive social unrest”
How do you figure? 0% inflation = prices stay the same.
Inflation helps tame the sting of debt. Take a new 30y mortgage. After 3 decades of 3% versus 0% inflation, your “real” mortgage payments in the last year have effectively dropped to less than 44% of the initial payment due to inflation. Extrapolate over car loans, student loans, and revolving debt… This keeps the lower and middle class afloat. In an envelope, inflation is great for the poor and terrible for the rich.
All I have to say is: “Powell sure ain’t no Volcker.”
I remember an interview with Volcker, retired. He said he got angry that markets weren’t listening to his jawboning and measured policy. So he resorted to the shock and awe that we know so well.
I don’t remember how long he was gentle before ratcheting up the pressure. If someone does, please let us know. Powell may do the same. You can bet everyone at the fed knows about Volcker, and how that finally did the trick,
I just looked it up for us. Paul Volcker became Chairman of the Fed on August 6th 1979 and the Fed Funds rate averaged 11.2 % that year.
The rate didn’t peak until June 1981 at 20 percent.
In 1979/80 the inflation rate was averaging about 12 percent.
In the 1980s globalization, Saudi Arabia, and China saved the petro dollar. Today, those forces are turning against it. Expect a lot more dollars.
If the Fed were to in fact accept 4-5% core PCE inflation, at least it would bring home prices down.
If you look at current inflation aka price raise for last 3 or 6 months .. it is trending at 0.1 or 0.2 percent month over month which is right around 2 percent or so annualized.
The problem is not zero inflation which would happen for sure
The problem is high plateau for asset prices which is gonna price out working and poor people from essential asset class aka homes.
Middle class is screwed
The high asset prices were caused by nirp and zirp. There’s a lot of inefficiency in the economy becauase low interest rates made the cost low. Same for consumer products. Companies jacked up prices and pushed low interest rate financing to make it appear palatable.
Both of these would be removed by *normal* interest rates, if sustained over the long haul. The consumer would feel pain at first, but lowered prices would eventually be good for everyone.
Core PCE has only been under 0.3% month over month (at 0.2% in November 2022) once in the last 6 months. It was 0.5% two of the last six months. In fact, core PCE has only been 0.1% or 0.2% month over month three times in the last two years. The decline in energy prices has reduced overall inflation. However, core inflation numbers are still pretty bad and oil has moved significantly higher since the middle of March.
I agree the middle class is screwed.
The lower middle class is already screwed. It’s no longer making a living by working hard, 2 or 3 jobs. 40 to 60k income no longer buys rent, food, car, insurance, healthcare plus on and on.
Got kids? You’re double-screwed in this economy. No pun intended.
middle class screwed? you haven’t even mentioned….chatGPT: before ANYthing, it’s coming for programmers first and foremost. the one thing chatGPT can do without hallucinating, is write code to spec! then it’s coming for Public relations, marketing, LAW, paralegals, medical transcription, medicine, radiology,
….au revoir les petite bourgeoise, mon amis!
It’s either « au revoir la petite bourgeoisie, mes amis » or « au revoir les petits bourgeois, mes amis », and there are some connotation differences, but yeah good one :)
Meh, the media keeps banging on about the supposed threat of chatGPT and other AI tools to all kinds of jobs (it’s nothing new, MS and other companies have been using it for ex. automatic form completion for a while). But in practice whenever our or other connected firms have used it, the result has been complete disaster. The problem with chatGPT is that it knows a little but not enough to actually complete its tasks in any effective way, and that includes coding and programming. (Especially coding and programming) So we wind up with snippets of somewhat partially completed work that doesn’t add up and winds up costing even more time and work by actual professionals to get things unscrambled and figure out what went wrong, and then we wind up just starting over and doing everything over again.
There’s nothing special about chatGPT or other AI, it depends completely on the training sets it’s trained on and we wind up stuck with the same GIGO issue that developers have been battling for decades, but if anything made even worse by the more elaborate garbage that chatGPT spits out. It’s basically very smart at being stupid, like a polished version of previous AI’s that at heart did similar things and were always supposed to be the next big thing. Except that with chatGPT, even more otherwise sober people have wasted countless hours with it due to all the irritating media hype, producing results that look nice on the surface but clearly haven’t been thought through, and make things even worse.
Agree that the American middle class, the working class, now even much of the upper class is facing hard times now though due to inflation–hearing from a lot of old friends and classmates now going expat–but that’s a separate issue.
I think a big segment of my college students (business dept.) don’t see a future. At least one to build learning for. The enrollments are falling, and absenteeism is radically higher than ever before.
Miller – Good post. You are right I have been “red team” to fix systems and it’s easier to start from spec than to try to fix spaghetti. Maybe limiting it to black box functions might save some time but you might lose the time in review and test. Who knows what vulnerabilities are included.
And yeah, expat to the East is how to go. I recommend beating the rush. Worked overseas for 9 years a while ago and ready to go back.
At a constant 4-5% people would be priced out of food..
What happened in the late ’70’s was that northern union workers got COLAs and pay raises driving up inflation in manufactured goods. Non-union southern workers went hungry. And the South voted for Ronald Reagan, a Republican, in overwhelming numbers for the first time.
I go to grocery store ,spend about $80-100 a month on sale items ,give to food bank ,I’m not rich but people need to help each other out,. We have become dependent on government for everything,that’s why we lose our freedom .
That’s what would happen to the market and assets but what about the bottom 80% of Americans? Would “rising wages” really increase enough to offset 4-5% inflation on a yearly basis. That’s a lot of compound price increases in a few years. If the market and assets crash, I can’t imagine that the job market would hold up nearly as well as it has been the last year.
It’s a good way to unwind all the windfall wage increases to low wage workers that’s for sure. Gotta keep them peasants down and all that.
A 4.5% rate of inflation gives the USD a half life of 15 years. In the past Anglo Americans have handled a dollar half life as short as 4 to 5 years. The 2 cents plain did not exist after WWII. The suggestion that a positive yield at your bank will ever again be possible is just fantasy. That legacy system of incentivized savings is now dead & gone.
The bottom 80% of Americans are looking at a slow descent into peonage.
Mario Draghi’s “whatever it takes” policy is now being applied here in the US. There are now officially no fixed rules of play. We will see a 4 to 5 yr dollar half life again in the near future, as people lose confidence in the new “there are no rules” schematic.
If the Fed decides to roll with 5% inflation, any big wobble in the long duration Treasury market will be met by the Fed with targeted QE at long duration Treasuries. The Fed can pin interest rates wherever it wants by unlimited printing and buying a la Japan. Similarly the Fed can target agency debt to pin mortgage rates. Once restraint has been abandoned in a pure fiat based environment the future becomes irrelevant to leadership; getting through whatever crisis today brings becomes all that matters.
The dollar would start to lose it’s 58% of market liquidity at a faster rate in this scenario, with QE at 5% creating a whack a mole conundrum of escalating inflation with stepped uup QE. Cost of energy becomes hugely important.
Musical chairs with unemployment, inflation, rates, and the energy/dollar . The Fed must be praying for higher unemployment
@JimW. “The Fed can print interest rates wherever it wants by unlimited printing and buying a la Japan. ”
How they’ll keep printing when the offshores dollars will come back like a wall of tsunami?
I’m reading somewhere already 100 nations decided to ditch the dollar.
“The Fed can pin interest rates wherever it wants by unlimited printing and buying a la Japan.”
You forget INFLATION. It’s now raging, which has put an end to QE.
Once inflation takes off, it ties the Fed’s hands.
Honestly, all the yammering about doom and gloom (on this website and many others) for years has resulted in a nothing, nada, a big nothing-burger.
It’s like that time in 1998 when I was driving around FL for my job and I would check out AM radio out of curiosity. Some loudmouth buffoon named “Rushbo” claimed Clinton had sold us out and the black helicopters were coming any day. We were all gonna be put in UN-FEMA camps out in the desert.
I’ve had my bags packed for a quarter of a century….checking the sky every day “Where are those black helicopters?”. I would think you guys would get tired of stroking each other’s “the sky is falling” fantasies…..
One truth remains: The future is unknown……
Fairly easy to predict the final state of nations that do the nonsense the USA is doing. Extremely hard to get the timing right. It took Rome a few hundred years to decline from it’s peak as a global bloodsoaked empire to nothing.
It’s quite entertaining, gloom sells. But it’s shooting yourself in the foot to go cash in high inflationary times. Hard assets and smart investing will escalate you to the top while the savers, the retirees and the all cashers pay the ultimate price – that is how the government funds all its past shenanigans
yup, a lot of ‘poor me’, ‘life is soooo hard’ crap in these comments. everyone thinks they deserve a participation trophy. as soon as you start feeling sorry for yourself you quit. that’s natural selection at work.
@nodecentre, stop gaslighting man.
Just look up the trend lines for number of households facing food scarcity and insecurity. Inflation has been hitting people in the stomach.
The only reason its all been “a big nothing burger” is because we are now living a world where the government will step in whenever they need to (and even in cases where they don’t) in order to prevent a repeat of 2008. That in and of itself is a big deal. But because the stock market didn’t crash like 2008 (yet) everyone thinks it’s all going to be totally fine. You can only kick the can down the road for so long
Funny, because the bottom 80% (or 50%, or 20%) of Americans are swimming in luxuries unheard of 50 years ago.
All this nonsense about living standards ignores the true adjustment in content of products at a given price. $10k car in the 80s vs today’s entry model at $20k? The $20k car of today is equivalent to a $200k car of that era – massive, massive real deflation.
Computers? Goes without saying (or you’d think ought to) … even more massively greater value per dollar today.
“Content” access (media) – a cable TV package 20 years ago vs today, likely 5-10x the content (real content) per dollar.
What about other luxury goods? The lower classes have convenience appliances that were luxury appliances 20-40 years ago. Branded luxury? Same…
Absolute nonsense when looking at headline inflation in understanding the cost to the population. This is because the basket adjustments are far, far too slow (and inadequate) to really catch up with product content change. Now, expectations change and get re-anchored. But living standards are miles ahead of where they were even 20-40 years ago.
As for accepting higher inflation? Unnecessary when inflation is falling rapidly and will reach the target 2% level within the next 18 months anyways.
Hey Truth, where can I buy a car that meets these requirements:
1) was <= $10k in the eighties
2) is in new or like new or restored condition so I can drive all over in it without hassle, ready to be a daily driver
3) has only the features & engineering of a 1980's car
and how much does it cost right now?
Other than a rare barn find, a consumer today cannot buy an equivalent 1980’s car. Consumers must have transportation. So your idea of hedonically adjusting inflation to the 2% target is popular with appointed Fed officials and defenders of the fed but ridiculous and meaningless to the consumer.
Buying a 1980 car? Not an option. So what?
You can buy a new car under $20k. Will exceed features of the $10k mid 80s car. Inflation reflected over the period is under 2% even using that mismatched comparison.
AGREE with RT,,, as in SO much!
WE, in this case ALL of WE the PEEDONs who have watched and recoiled from the VAST and continuing degradations of our savings, cannot at this point in time rationalize any of the INCREDIBLE actions of the FRB.
Unlike our day to day increases in almost everything we need,,, ( clearly NOT wants.)
Some how and Some when,,, our owners must and will understand the dynamics and other ”forces” that will make them,,, not let them choose, REFOCUSE on making DAMN SHORE that ALL the folks in USA willing to work hard, WILL,,, in fact reap the benefits of their hard work…
Please keep firmly in mind that when you take the ”merit” out of meritocracy,,, you end up with less than ”cracy”,,, and in fact you end with crazy ”shite.”
IMHO, we are at that stage.
Really where can I get a new car for under 20K?
I guess you are talking about Kia Rio. I clicked on Kia website. First it says MSRP about $16k. Then when I ask for a quote, the MSRP on Kia’s near me jumps to $18k+. And how about taxes and fees? Am I supposed to believe any dealer will let one of these go for under $20k?
…because we all know that those who don’t fit the paradigm simply disappear, don’t they?
may we all find a better day.
Which appliances? You mean something with the same basic chassis festooned in extraneous bells-n-whistles which fail/break and require constant servicing? And don’t look as good in the meantime, because todays industrial designers grew up having wet dreams about Transformers? Ugh.
40 years ago things like organic food, Union-Made durables and dry goods and QC’d user-serviceable machines/hardware were standard off-the-shelf concerns — not boutique items reserved for posh nosepickers. Good luck finding the kind of quality you saw in anything on the shelf of a Sears Roebuck or Monkey Wards 50-60 years ago vs today.
It’s been diminishing returns for the American working classes for several decades now. Calling it all doom-n-gloom is just lazy contrarian BS.
Look at the TYR mono amplifier from Valencia, California’s Schiit Audio for an amazing build, design and quality. Old-school & highest performance that there is for $1,600. A 12 lb choke in a 55 lb piece of gear that’s got a 5 year warranty.
Jason Stoddard and Mike Moffat are the audio engineers that make the Schiit. And their transformers, which are as important as heck, are made in California.
Of course, my main system runs with the good Schiit; a DAC, a hybrid vacuum tube preamp and an amplifier.
Prairie — hear hear! Still running my little 8b in triode every single night. When you get something really right, hold fast; it’s folly trying improve upon perfection.
“Thanks to (Sidney) Smith’s clever transformer design, Marantz could commend the Model 8B for use in either Ultralinear or triode mode, the later effected with a few minor wiring changes.”
Burger. 1980 – 2$ 2023 – 6$
Gas. 1980 – 1$ 2023 – 4$
College Tuition 1980 – 20K 2023 – 60K
House. 1980 – 100K 2023 – 400K
Health insurance 1980 – employer paid all 2023 – 12K
You were saying you get more value for less money? Only for computing and IT, not for anything else
Yeah that’s the issue, the big majority of Americans lack the negotiating power to have their wages rise with inflation, and it’s not like people can just jump ship and take a higher paying job that easily. Many of the higher paying jobs are in other cities, and (ironically with inflation) people may have a harder time finding another home, or may be underwater, or have family commitments or just seniority in their old company. So the big majority of workers are hit on the chin with those price hikes. And if basics like food, housing, transportation become out of reach for the majority of Americans, that’s when all hell breaks loose, esp with 400 million firearms floating along. The kind with pitchforks and nooses swinging from lampposts. It’s easy to forget that as bad as the inflation in Argentina was, at the very least there were policies in place to make sure salaries went up to meet the inflation, yes a problem since they fanned the inflation further but they made sure that a lot of the worst of the price increases were at least somewhat matched by rising wages to meet the costs, and prevented the worst of the social unrest. If a country has sky-high inflation without rising incomes for workers, especially in a place like the US with such sky-high tensions as it is, then a civil war is practically inevitable. Like our old prof said, uncontrolled inflation has brought down far more great powers and major empires than any war ever has.
To keep wages up new approaches will be needed. That’s why the Chicago Teachers Union elected one of their own as mayor. They will do fine salary-wise.
Similarly, trying to keep ahead of inflation will drive fierce fighting for the political power to distribute whatever remains.
So let’s assume all of this plays out and by 2024 we are still at these levels of inflation with no end in sight. What’s the investment play today for such a case? Out of equities and into what? Thanks
you’re suppose to figure that out yourself, after reading all inputs. that’s vulgar, your question.
If that happens your best preservation is big bags of rice, salt and maybe some sort of flavoring. So you can befriend and feed the hungry mobs before they cross your moat..
bat guano of course
S&P500 & real estate. Sprinkle in some gold or, as I prefer, digital gold
Today with high inflation and the Fed raising rates.
1) Buy Ibonds.
2) Hold real estate as an inflation hedge vs paying rent. Buy Real Estate if the prices fall 30% and Wolf’s inflation (OER) vs house price intersect again like they did in 2012.
3) Buy and hide out in short term (6 month-1 year) CDs or Treasuries until the Fed stops raising rates.
4) Buy high dividend large cap stocks. Oil, industrial, utilities consumer products
5) Buy some gold or gold mining stocks.
When the Fed stops raising rates and inflation is falling:
1) Ease back into the stock market with ETFs (S&P500, mid-cap, small cap)
as ST Treasuries mature.
2) If long term Treasuries have peaked, buy 10 year and 30 year Treasury bonds. My dream would be an 8%+ 10 year.
3) Use 10% as Mad Money to buy individual depressed stocks. Airlines, Automotive, Tech.
This is hard to time since the Fed doesn’t tell us when they will stop raising rates.
Nice – exactly what I’ve been doing myself.
“This is hard to time since the Fed doesn’t tell us when they will stop raising rates.” Once they say they’re going to stop, or when they first begin to lower the rates, then we know. The question is once they stop, if they’ve caused a recession, when does it bottom? In both 2000 and 2006, it took a few years after the last hike. So maybe even let a few of those STs take a bonus 6-12m spin before easing ’em back into the ETFs.
Sounds like a solid plan, at least I hope. GL!
Six months ago, in mid-October 2022, Russell Napier addressed this issue with a somber forecast.
“This is structural in nature, not cyclical. We are experiencing a fundamental shift in the inner workings of most Western economies,” he says.
Why is the shift happening? “The main reason is that our debt levels have simply grown too high. Total private and public sector debt in the US is at 290% of GDP,” he explains. “My structural argument is that the power to control money creation has moved from central banks to governments.”
Napier contends that, “Engineering a higher nominal GDP growth through a higher structural level of inflation is a proven way to get rid of high levels of debt.” “I think we’ll see consumer price inflation settling into a range between 4 and 6%.”
Why 4 to 6%? “Because it has to be at a level that the government can get away with. Financial repression means stealing money from savers and old people slowly. The slow part is important for the pain not to become too apparent.”
Napier states that central banks have become powerless to control inflation because of this structural shift. It’ll be interesting to see what happens with the US debt ceiling and how much spending Treasury does as the summer approaches and President Biden & Congress unleash the 2024 fiscal budget.
A decade plus of breaking the Rules of Money has left the USA in a bad place. Inflation will continue despite what the Fed does or doesn’t do. Long term bond yields will rise. The price of a mortgage will rise. Companies carrying debt on their books will go backwards. The stock market will, at best, tread water.
Rule # 1: Money must have value.
Rule # 2: Future Money must be worth more than Short Term Money.
It will be evident how little governments are in control of money creation when the FED stops buying Treasury debt and removes a subsidy to which the politicians have grown accustomed.
If the Fed stops buying Treasury debt, certain images will be found on certain bankers computers and voila, new bankers.
Don’t kid yourself about how hardball all this can get.
The problem with this “solution” to high levels of public debt is that financing costs for governments also continue to rise with inflation, and it’s not like they’re going to stop spending, so any supposed debt relief is quickly wiped out by higher purchasing and borrowing costs anyway. Not to mention that the massive price rises (coupled with the failure of wages to keep up) will quickly result in massive violence and social unrest when a large percentage of the population can no longer afford basics like food, housing, transportation, education and healthcare. This is why every respected economist since Adam Smith (and including Paul Volcker) has pointed out that sound money and price stability are the pillars of a functional society. Without that, everything falls apart. It’s complete delusion to think that debt can just be inflated away, it doesn’t work that way especially in today’s societies.
I hear you loud and clear. Sound money is not ZIRP.
Napier adds, “So the level of debt — private and public — to GDP has to come down, and the easiest way to do it is by increasing the growth rate of nominal GDP. That was the way it was done in the decades after World War II.”
His thesis is that economies have to grow their way out of debt, and he also opines that manufacturing and capital investment will (and must) return to the West as part of this.
Napier makes the point that the last 40 years’ structure has been broken and changed. The new structure NEEDS inflation to continue on, is his premise.
We’ve done it twice before. U.S. debt levels following World War II were $240 billion. The world’s richest man today has more than that. So how did we pay for the war? By inflating that bubble away, up and away. It happened 40 years ago too, and it’s happening again. Don’t kid yourself, inflation is a cycle to pay for things
I think the “muddle through” prediction ignores the wealth effect. A crash in the value of pretty much all asset classes would drastically drive down consumer demand, sparking a serious, long-term recession.
After the dotcom bust had run a couple of years, and the Nasdaq was down 78% and the S&P 500 was down 50%, we got a mild minuscule recession. People have to lose a lot of their money and a lot of hope — and people have to lose their jobs — before they slow down their spending.
Right, but we cut interest rates to zero and ran MASSIVE budget deficits. Do you see the Fed repeating this move?
This difference is INFLATION. Has everyone already forgotten? Has everyone already gotten used to it, and it already disappeared from the radar? Stuff moves fast, LOL.
Back in 2000, core CPI was 2.5% then it dropped to 1.1% by late 2003.
Now core CPI = 5.6% and RISING.
That may have been true prior to the QE era.. but now ??
Seems the playbook is to not allow 50%+ asset corrections. Drops in spending are not allowed anymore ?
I understand the cycles, but it feels like the rules really have changed, especially when no one (even on Wolf Street) can fathom a QE worshipping Fed raising rates to anything resembling a true tackle of inflation….7%? More?
I’ll just repeat it here: This difference is INFLATION. Has everyone already forgotten? Has everyone already gotten used to it, and it already disappeared from the radar? Stuff moves fast, LOL.
Back in 2000, core CPI was 2.5% then it dropped to 1.1% by late 2003.
Now core CPI = 5.6% and RISING.
The rules have definutely changed. I can’t imagine a company as big as Lehman being allowed to fail nowadays. Too much risk. I think the 2024 election theme is going to look a lot like the 1980 election: blame government
I would love to hear your additional insights why consumer spending remains robust even when asset prices are falling so much. What is the economic underpinning of this behavior?
Is it because a great majority of current spending is from people who are not participating in asset price appreciation OR because majority of spending is on necessities that are hard to avoid?
Do household debt levels affect this is any way
Thanks in advance
It’s all psychological:
1. Older boomers: “can’t take it with us”
2. Younger boomers: “got used to the lifestyle”
3. Gen Xers: “whatever, we’ll figure it out.”
4. Millennials: “yolo!”
5. Gen Zers: “they got theirs, we want ours”
Combine that with still (relatively) easy access to credit, and once more, so long as people can make the payments they will continue to try and keep up with the Joneses.
As Wolf has said here before: Americans have a LOT of money to spend.
Whether it is being spent recklessly or not is a different story…
Overall, asset prices are not falling off a cliff.
As mentioned in the article, asset prices would crash if and when long term bond yields rose significantly – which they have not, at least not yet.
Actually, alothugh asset prices are falling but not a lot.
Just look at bitcoin, home prices and stock market.
These have been proven very very resilient.
On top of these, discretionary spending is now slowing down.. packed restaurant, packed flights, packed hotels etc etc.
People are still spending like crazy because we have too much money sloshing around.
But US consumer spending really isn’t all that robust right now, at least for the most recent months? Wolf posted on this, retail sales and spending for March were way down, and they’re headed even lower for April….
[remainder deleted by evil censor Wolf]
You’re posting nonsense:
“Wolf posted on this, retail sales and spending for March were way down, and they’re headed even lower for April.”
I said no such thing. I blocked another comment of yours where you said the same thing that “Wolf himself posted…”
If you want to cite ZH headlines, fine, say, “I saw XY and Z in the headlines on ZH, and therefore….” But don’t tar and feather me with the BS you saw in the headlines on ZH.
Here is what I actually said, quoted from my own article:
“Q1 retail sales were up by 1.7% from Q4 and by 5.4% from the same period a year ago!…
“The insert shows the recent details of the trend: the slowdown late last year and a pickup so far this year:
I think the underpinnings are psychological in nature. Everyone seems to have forgotten the global pandemic and its follow-on effects. Having people die, almost die or almost dying yourself — all pretty effective grist for instant attitude adjustments. You can never go home again, but it doesn’t mean you can’t buy a big old yacht and dock it right up next to where home used to be.
China is trying to stop a 6.3 % drop in real estate prices printing money ,this is worldwide,who will default first UK,JAPAN,US,CHINA . Derivatives will destroy the world .
Japan goes 1st. They did NIRP 15 years before the US.
Flea this is really the great question. All these nations are in ludicrous mode, and they run on in concert. Which one falls on its face first?
I agree with you 100%!
But how long it will take when Fed is reluctant to let assets value go down. They committed 2nd moral hazard by ‘bailing out’ of SVB and other banks, by adding 400B to it’s balance sheet.
Imagine the plight of numerous pension plans of Cities and States if S&P dives 40%? It is hard to believe that Fed won’t do something stupid like more QE. Congress, WH and Wall St will go along with it, like before.
Wages are always related to the price of houses so yes inflation will increase and wages also compensate for the price of houses, until now it is the route of the Fed.
House prices will probably not go down, the Fed has no interest in doing so.
The inflations came out of the bag. Forgetting the 2% is a joke now.
The decline of the dollar has already started in the world, which means more imported inflation.
haircut yesterday was $17. pre-covid $10. during covid went to $12. now $17. In Berkeley.
Who’s cutting your hair for $17 in Berkeley, a homeless meth addict? I’m in SC and a decent haircut at a barbershop is $30. Pre covid it was $25.
I bought clippers in 2008 and started doing it myself. Total cost $18 from then to now.
Mine jumped from $14 to $27 over the past 2 years here in Naples Florida.
I cut my own hair ,clippers shave it bald good to go
Mine cost 30.00 a couple of years ago for a decent electric cutter with various size attachemnts. My first one was less than $20 over 5 years ago.
Try purchasing electric clippers in Reno, NV. Everyone of them were used with hair clippings on them. Trim your hair and return to the store. Sign of the times I guess, had to purchase on Amazon.
Women’s haircuts where I’m at have gone from 75. precovid to 100 or 120
That I can understand. My wife cuts my grass but she has to go somewhere proper. It’s possible that some women could get by with a homegrown job. I’ve actually seen it done rather well—simple bob cuts. But in general, there’s a lot more time and skill (and yes, even concept/art) that goes into hair done in a salon vs a barber shop.
I joined Wolf. Bought an Oster Classic 76 with the accessory clip on height attachments.
Just slip on the ol’ #3 and buzz everything off around the sides and back. (Helps that I am mostly bald on top. Just knock that off with a razor in the shower.)
Also helps I sheared sheep for years. lol
I started at the start of Covid times because I could not find an open barber shop.
Not a bad investment. Also means I look way more consistent because I can clip every 2 or 3 weeks instead of randomly… whenever.
Me too except longer in winter
“House prices will probably not go down” => Already going down if you read and believe WR.
Fed’s wants an orderly down and so far it is happening. 15% every year down.
Letting house prices crash is one of the quickest ways to shore up Social Security and remove higher wage pressure from the working class because it relieves a bunch of the cost of living pressure. The losers would be mostly pensions, REITS (noticed a lot of ads for these recently), air b n b owners, indebted speculators and of course typical recent home buyers. Blackstone and such probably wouldn’t be hurt much since they bought a lot of the rental stock in the post 2008 crash in huge deeply discounted lots straight from Fannie and Freddie. They’ve been collecting rents and may not even lose much in a fire sale because they may already have made up the initial purchase cost on nosebleed rents. I bet the Fed can sacrifice housing if need be.
Fed would never hurt their masters
Fed would only hurt working people not the asset holders
Blackstone and Co has bundled most of their mortgages into MBS and are guaranteed by the GSE. Blackstone may take a hit on not servicing rent payments but we the tax payers will be given the bill of the speculators. The speculators that bought the MBS will be paid 100%. I am guessing the GSEs, in not wanting to be marched in front of congress to explain all their MBS losses, will just go the forbearance route and let the home owners live in the houses until property values go back up. I could be wrong. Just a guess.
AirBnb and indebted mom and pop speculators may take a hit but Blackstone and Co will be there to mop up the mess at fire sale prices.
Now that I think about it. I just read a research article that stated only 17% of rentals are currently owned by big companies. The other 83% is individuals and small LLC type companies. The research firm was we predicting that in 10 years, 40% of rentals would be owned by big companies.
So maybe they are counting on what I described above. A financial crisis that wipes out a lot of the individual mom and pops landlords and the Blackstones and Co buy up a lot of rentals?
There are large private funds that buy up many houses and throw each house into a separate opaque LLC in order to add another layer onto owner secrecy.
Often owners of multiple income properties will put them into separate LLCs in order to isolate potential liability. If someone sues because of an incident on one property, the other properties are protected from the lawsuit because they are owned by separate entities. I used to set these up, but we never did it for secrecy purposes. I can imagine in some cases a non-managing member of an LLC may want to remain anonymous on public filings, but potential liability was the primary reason we used the structure you describe. Some states have facilitated these structures by allowing a “Series LLC” to isolate assets and ownership within a single LLC.
Rojogrande, yes, your clients may not have been doing it for secrecy purposes but others do. It’s been mentioned again and again on articles on offshore hidden money. I also traced one “we buy houses for cash” and one of it’s front persons fairly far back.. Consider the famous & politicians. Ours and others.
I suspect that they’re already OK with 3% without actually coming out and saying as much.
I am of the mind – The fedralists will accept 5% target and then repirted core uplifts to 8-10%. Then the fed hiles to 12-18%. That it is my hunch for 2024 q1.
Should be interesting to see how far short term rates fall should there be a recession. How much of a pivot are we talking about? Dropping rates to zero and credit tightening would imply serious financial compression. The structural problems with inflation remain. I don’t think the Fed can do a traditional drop to the bottom to get things moving.
I asked my friend Wolfman, and he said he would buy I bonds for sure..
Crazy times we are living in, only to get crazier.
I bonds are a ripoff
I’ve always said it’s crazy to buy a 10-year or longer treasury with federal deficits running $1.5T to $2T and nobody doing anything about it. If we get only 5% inflation over the next decade, we’ll be very lucky. Add in inflation caused by the wealth effect, plus inflation caused by periodic money printing to offset recessions, and you have a recipe for complete disaster on the inflation front.
The Fed needs to completely disavow use of QE, and the legislature needs to reduce the deficits. Deficit spending financed via QE (i.e., money printing) was a BAD idea that never should have seen the light of day. Our biggest problem today is incompetent leadership, as well as the corrupt system that harbors it.
I’d like to bring up the ECB’s policies for the last decade, and European and non-EU member states adopting negative interest rates. These economies were depressed but not even close to deflationary. Everyone survived just fine. Look at Portugal now. Asset prices in luxury euro markets are even frothier than in the US.
Granted, the dollar is different from the Euro. But there’s more than one way this could play out if the Fed ended hawkishness.
The Eurozone’s inflation is much worse than inflation in the US. And it also has moved into services were it is now raging. And QE is over, and QT is in full swing with the balance sheet having dropped by over $1 trillion:
Grocery bills in my country are insane, especially for vegetables, fruits and other unprocessed food. It doesn’t matter much to me but inflation is really hurting many people.
You can’t get close to inflation on safe interest rate instruments. We don’t have T-bills for the private market. The local equivalent to CD’s are going for about 3% for 12 month term. Better than “super saver” accounts at 0.5% but still largely negative.
Personally, I highly doubt housing would go down. CRE yes, because its affected by Variable Rates. In terms of regular housing, people would buy faster and for higher prices, if needed. Cash would be “trash”, so better to put money into a physical item than to hold “trash” in CD’s. FOMO would do the rest. Based on conversation with many recent home buyers, I believe that it is the same reason why housing and new/used car market remains hot overall. Saving money and conservative spending gets punished by FED. Best CD out there will still end up behind inflation.
Also, it seems to me mortgage interest rates don’t cross 7% as if lenders discovered it as no-go zone and don’t cross that despite consistent FED hikes.
Housing already went down:
The median price of all types of homes sold in February, at $363,000, was down 12.3% from the peak in June 2022, and was down 0.2% from February 2022, according to the National Association of Realtors. This was the first year-over-year decline since February 2012, when the market emerged from Housing Bust 1 (going into Housing Bust 1, the first year-over-year decline occurred in August 2006).
People do forget the facts and trumpet their own horn.
Home prices have indeed gone down.
Kinda depends on your time frame in that graph above eh?
I think you’re missing some data on # of homes sold. There is a massive shortage. As somebody who has been trying to buy for the last 3 years I can tell you that home prices have NOT come down in my area (central Ohio) and continue to sell within 24 hours of listing
It does not matter if there is a housing shortage.
In my locality, homes sell for $750K and average wage is $65K.
With 6% plus rate, do you see the disconnect ?
Obviously housing is localized, but while more houses get listed recently in Chicagoland area, prices are at or above 2021. They go contingent in days after getting listed and get sold at or above listed price. There will be a spike back on this chart after (in line with trend during previous years).
I’m certain places they have. Not everywhere, yet
How much more will they go down? Is perhaps the 1 Million $ question
Nissanfan – it is local. Chicago is in the top 10 most affordable housing markets out the the top 150 sized cities. The average home owner spends 24% of their monthly income on housing in Chicago. Meanwhile, in Los Angeles, it is 63%. Now that number probably has dropped for LA as house prices have dropped some.
Wolf Canada and ecb are reducing debt,but US isn’t .We can’t because the real reason they raised interest rates.is to get money from people to pay off the world .Who are dumping our dollar
“So now there are voices – voices with big megaphones – that say that the Fed will and should change its inflation target because this inflation will not go back to 2% without a lot of economic damage, and to get that kind of economic damage, interest rates would have to rise much further, and neither the Fed nor the White House nor Congress is willing to go there.”
F**K all these people. They aren’t the ones getting hurt by inflation. I’m about sick of every billionaire and hundred millionaire on the planet. They are shark chum, in my opinion. Something needs to be done.
Oh, something will be. As an M.A. in Historical Studies, I can assure you. Exactly how it plays out in real-time, no, but I could outline the generalities.
Let’s just say very few people in April 1789 could have foreseen what the poorest women of Paris would do that following October, but there were those who understood the system could not go on as it was, and trouble was looming. Very few foresaw that war would erupt in August 1914 over some Archduke killed by a teenager in June, but there were those who knew war between the European powers was inevitable, and would likely be horrific.
So, your attitude isn’t a lonely one. I think we’re just seeing things get rolling.
Yes, volatility isn’t just something on a VIX graph. When it goes analog, watch out!
…the universe will remain analog longer than we can embrace a digital reality…
may we all find a better day.
Agreed. There are a lot of people who know that the status quoa is unsustainable, but no one knows exactly what will be the shot heard around the world.
RE: “shark chum”. Sadly, I’m coming around to this view myself.
These people, in addition to being propped up by the government even when they are incompetent and fail big time, they’re just such complete jerks. Makes it very hard to have any sympathy for them.
A lot of Wall Street sounds the same these days. What they come across like to me is a bunch of drug-addled gangsters with a massive entitlement complex. I’m really tired of hearing from the whole stupid lot of them.
The free money circus went on for too long. It’s time to take out the trash.
It’s also a waste just how much brain power and resources is wasted on “analyzing,” “trading,” and “managing” equities.
You want to know what “economic damage” is? It’s when you print 10 trillion dollars and run up asset prices so high that the working class and the poor can’t even afford shelter, while the billionaires steal the future and park it in their bank accounts. But I’m supposed to heed their warnings about an imminent economic catastrophe if the FED actually does their job and wipes out inflation?
Let me tell you something, the 2% inflation target is a F**KING SCAM. Inflation is theft. Who came up with this bogus target anyway? I am sick and tired of them moving the goal posts as they see fit. The FED has been in violation of their mandate for a decade +, and they are still in power WHY? And now we’re supposed to sit back and let them tell us that not only are they not going to bring inflation back to their 2% scam, but that we should live with 5%? Let’s roll some guillotines.
Working class and the poor? How about the supposed middle class. My income is in the top 1% globally, I’m supposedly “upper middle class” according to sociologists. Assets and passive income galore due to frugal living and good investing. Still, can hardly afford anything. It’s ridiculous.
My RX is create a new political party, that reads the constitution and sticks with the original meaning, and makes a list of judicial opinions that are unconstitutional and therefore will be ignored by local elected officials. The local elected officials use the power of their office to allow their citizens to engage in constitutionally protected commerce, such as intrastate commerce, local education and more laying aside ALL alphabet soup agencies. This party elects officials to higher and higher offices until it finally has congressional reps who will vote against EVERYTHING, and a president who vetoes EVERYTHING and actually exercises his executive power to decline to do anything that violates the plain text of the constitution.
This program will end money printing, the Fed, bailouts, US Army, Federal education, NPR, OSHA, tax credits, IRS violations of the bill or rights, federal gun control, federal laws about what you can put in your body and a trillion other abuses of our peace.
If you want some of the above laws, feel free to pass and enforce them in your own state. And if you make your state really nice people will choose to move there.
The new fedgov will be focused only on what is actually interstate commerce, borders, mediating disputes between states, and civil rights. If the people are smart they would also have this truly limited fedgov break up these ridiculous oligopoly & monopoly companies.
There would be 20,000 more ticker symbols on the stock exchanges. You could fly a small plane or drone within the borders of your own state without a federal license. The fedgov would no longer put limits on how many residencies there can be or what your doctor or pharmacist could do. You would no longer be required to testify against yourself providing records to the IRS- they would have to do a real criminal prosecution. And much more.
Also if the people are smart they would tell all these countries that want free trade “sure you can have free trade, apply for statehood otherwise pay tariff”
We’d still have a Navy though, that’s in the Constitution.
No guillotines needed. No violence.
I’ve been on the edge of starting this political party many times. Raging Party?
Ron Paul was the closest to what your talking about(Feedom), but I was about the only one in taxachusets that voted for him. Still have his sticke on my 2001 X5 bmw.
Sign me up
Nullify Marbury v. Madison and most of the judicial abuses evaporate.
Mock guillotines are becoming a popular item to bring to protests, on both sides of the political spectrum, and in several countries. One was positioned right outside Jeff Bezo’s house in 2020. I hope he was home to see it.
Inflation is THEFT, and thus those who promote the inflation THEFT are THIEVES. (note to the Federal Reserve Board)
Remarkable no one mentioned the Federal Reserve Act and the mandate of STABLE PRICES. Even 2% accepted inflation rate is a violation of that mandate which is essentially an instruction and agreement that allows the existence of the Fed and their special powers. Violation, but who is watching? In a system that boasts of “checks and balances”, who checks the Fed?
And what would happen to all these banks with big “hold to maturity” long paper ….more failures…more bailouts….which equate to even MORE inflation.
As in physics, in economics for ever action, there is an equal and opposite reaction. The Fed is dishonest in their intentional ignorance.
As in politics: in “science” and “economics” these days – there are guys with guns backing up the dishonest and intentionally ignorant.
As the Fed dines in luxury, the board members say: “let them eat at McDonalds!
Wait until china nationalizes all of our American corporations,SHTF because corporations rule this country .
Anyone else here remember the Most Favored Trading Nation debate from the mid 90s?
The 2% target has neither a theoretical nor empirical basis — it was first adopted by the Central Bank of New Zealand and spread via groupthink from there to other central banks around the world.
But your implied 0% target is shunned because central banks often undershoot their own targets and they will NOT countenance deflation — for good reasons mostly forgotten by the public because the damage such periods cause have been kept off the menu since the late 19th century.
The late 19th century saw the biggest increase in the standard of living for the most people, ever. And it was a deflationary period. What damage do you speak of?
There are a few issues with the US gov getting two private Morgan bailouts, though. Then you can leap to ’32 and see banks dropping in waves, savings wiped. We were lucky to avoid revolutions a few times there.
It’s getting scary lots of people on bottom are starting to complain,at some point in future it might start to unravel
I’ve got news for you: It’s not just the people “on bottom” who are starting to complain. I am hearing it even from remnants of the upper middle class who own houses but are getting bled dry from every direction.
I know Wolf believes the CPI numbers, but I have my doubts. I believe these are tortured statistics which are massaging the numbers to paint a more rosy picture than is actually occurring.
Depth Charge.. Where do you live in Florida?
DC lives in Florida !
That explains everything !
“Depth Charge.. Where do you live in Florida?”
No. West coast.
It has started.
At no time has the FED stated that they will start up QE again or that they will begin to lower rates . It is the Wall ST crybabies who desperately want lower rates
If the projections for considerably higher rates become reality , then there will be huge damage to the economy. Anything to do with real estate will tube . Anything to do with growth stocks will tube . Anything to do with bonds will tube .
Banks would be decimated as their costs of deposits soared and the collateral for many if their loans tubes . Those banks holding longer term Treasuries would see the value of their bonds tube .
The bottom line is our economy is built on debt .
Much higher rates will make replacing this debt exceedingly expensively.
ive been assuming inflation was the plan all along. basically the only way to eliminate the debt. relative cost of existing mortgages go down so homeowners are happy and wages and prices can keep going up. seems like it would help us against china as well. all paid for by boomers retirement accounts. every scam needs a sucker and they are the only one big enough to front the bill.
” inflation was the plan all along”
If it was indeed the plan all along, it would look just like what we have seen.
“We must unlearn what we know about M2” J Powell, after pumping M2 by 38% in two years and just prior to a massive inflation spike.
Unlearn? Really? It was the indicator intentionally missed.
Fed needs to continue the QT by $100 billion+ every month.
Nope, the Fed needs to be dissolved and cease to exist.
Fed Funds to equal a e month moving average of a legitimate inflation metric. Automatically.
Fed to abandon maturities greater than ten years.
Those two would be a start. But that takes power away from the Fed who will lose their subjectivity and influence.
This manipulated yield curve is part of the problem.
The BOJ has declared their commitment to yield curve control, and that may be a clue to the Fed’s attitude as well.
S/B “Fed Funds to equal a 3 month moving average of a legitimate inflation metric.”
The FED obeys the BIS, the bank of central banks.
Look for error.
Raging Texan, you do realize that abolition of the Fed means no lender of last resort and a return of the era of “wildcat banking” right? Or are you proposing some other mechanism of bank regulation, supervision and having the Treasury absorb the Fed and its functions? The latter would be workable, though the orthodox neoclassicals would pitch a fit (not that I care what that gaggle of fools thinks)
I outlined my proposal in a lengthy comment above awaiting moderation.
In brief, pull out the Constitution, read it, actually follow it.
This would undo the new deal, great society and a bunch of other unamerican garbage and destroy the fake capitalism system and oligopolies we see today. Fractional banking would end.
Banks should have no special privileges. Let them go bankrupt if they do stupid things. Prosecute businesspeople if they commit crimes.
VERY clear IMHO that Wolf’s essay on the subject was not only ”spot on” but absolutely correct.
Acceptable ”average” inflation should be ZERO…
Surely it will take some actual FOCUS on the various and sundry and extensive ”inputs” to be able to manage ZERO inflation,,, no doubt about it…
Gotta ask why ANY so called central bank would be allowed to exist other than to make damn shore this would continue, for eva???
In this era, absence of banking regulation as well as central banking would turn into a boiling nest of frauds that would impoverish vast multitudes. These would be sticking you up in the street.
Nice pipe-dream, though. Maybe in Texas the fantasy is, everybody is strapped and ready to self-police?
phleep I her this argument you say a lot, essentially that we must have an unconstitutional fed with a fractional banking system otherwise we’ll all be poor. I reject this argument but feel free to support the status quo if you want. FYI the best way to support the status quo is to just leave all your wealth in USD cash or low interest USD denominated govt bonds like ibonds.
The New Deal saved US Capitalism. If it wasn’t for that the US may well have gone the way of Russia or Nazi Germany.
We didn’t have a Fed until the early 1900s. Somehow the economy did vastly better in hundred years before that, despite a civil war. We don’t need the Fed. Never have. You have bought into the propaganda.
What happens if the FED actually achieved its beloved 2% inflation?
Each year workers would have to go humbly, hat in hand to the boss and ask for a 2% raise just to stay even. The boss would expect 2% more productivity from the worker, et cetera, et cetera, et cetera, and gruffly demand more work from the worker.
Anyone see a problem for any of the protagonists in this scenario?
Nah, you guys are the bosses, not the workers.
Actually, the models reflect a 1.5% productivity increase. So along with the 2% inflation, actual wages should go up by about 3.5% annually. If you score a promotion, you get the customary 10% bump and the game resets at each level.
Your scenario of fair division of the proceeds of productivity between profits and labour is a noble one, Prashant, but it does not match the empirical data which shows how wages and productivity have been disconnected since the early 1970s, which is why average wages have not risen in real terms for decades now and inequality is rampant.
The proceeds of productivity have been almost entirely consumed by the government. It is no coincidence that the disconnect between real wages and productivity started at the same time the US broke the US dollar’s anchor to gold in the early 70s.
GUV MINT is just one visible part of the mechanism set up by our owners AKA ‘the nobility’ AKA the oligarchy, etc to steal the productivity of WE the PEEDONs.
Some of them apparently decided it was safer in the long run, with the events in France in 1789 in mind to set up a ”GUV MINT” included the legal systems needed to steal ”legally” instead of by outright forcible theft, etc., which had been the norm for the previous thousands of years…
Just another swing of the pendulum, eh???
If I’m not ready to be 2% more productive each year, I reckon I don’t deserve a wage at all.
Perhaps because I’m a relatively shallow reader of macroeconomics articles, Wolf’s analysis was very interesting – an informative original analysis with good food for thought.
“What does acceptance of 4%-5% inflation mean for yields and asset prices?”
Given Fed acceptance of 4%-5% inflation, it does seem logical that long term yields would forthwith spike sharply higher. Is there is any way that could be prevented? Compared to the three banks that have failed so far, wouldn’t that put many more banks holding long-term-low-yield treasuries in dire straits? Seems like that might make the so-called “banking crisis” morph into a super-full-blown banking crisis.
Or have the banks reacted to the danger signals and somehow adjusted their interest-rate risk strategies already?
The Fed will announce it’s new model, BalloutGPT, a neural net AI that analyzes real time data like never before and automatically prints money and injects liquidity as needed to keep the assets growing.
Would the 10 year hit 6% if the Fed bought them all? Would mortgages hit 8% if the Fed bought them all? Would anything go down in price if the Fed bought them all?
There’s no problem QE can’t solve, except inflation.
“There’s no problem QE can’t solve, except inflation.”
Exactly, and raging inflation is what’ve got after years of QE, LOL
Wording of Fed mandate was changed in Sept/2020. Never let a good crisis go to waste.
More stress on “maximum employment” that is also “inclusive.” Language on “risks to the financial system” = excised.
Fed gets official cover to cut big as soon as unemployment spikes and shame about that stock market, billionaires.
And so they wait.
IMHO…. 2% is going to be difficult to achieve. Honestly, how is the FED going to do it? The 2010 to 2020 period of low inflation has only been matched by another 10 year period of 1960 to 1970. If you go back 63 years to 1960 and include these two ten year periods (1960-1970, 2010-2020) of super low inflation, the average inflation rate is still 3.8% for the past 60 years. Globalization helped export inflation the past 15 years and that is over. All those costs of health care, OSHA laws, minimum wage, and overtime laws keep the price of manufacturing down in China but will be added to the cost of production in the U.S. Things are going to be more expensive unless the U.S. manufacturers find other cheap labor countries. In addition, the petrodollar also help export inflation. The petrodollar is waning. It may happen but it will be more difficult than in the past.
Can we live with 3 to 4% inflation and 7% mortgages. It sort of looks like we have the pat 60 years. We have been spoiled the past 12 years with artificially low interest rates. I totally agree that asset prices may not like higher 3% or 4% inflation and neither will housing.
From CNBC: The majority of potential homebuyers, 71%, say they will not accept a 30-year fixed mortgage rate over 5.5%, according to a survey done in March by John Burns Research and Consulting. The current rate, however, is around 6.4%. In addition, 62% of buyers said they believed that a “historically normal mortgage rate” was below 5.5%. The average going back to 1971 is 7.75%, according to Freddie Mac.
What is wrong with these people. LOL They better get used to 6% and 7% rates in the future. Even if inflation drops to 2%, I am not so sure we will see 5.5% 30 year mortgage rates. Sure, some of those historical mortgage rate graphs show mortgage rates below 6%. Why:
The “average rates” in surveys taken before 1971 do not represent the way Americans borrow money today, warn experts such as Keith T. Gumbinger of HSH Associates, a mortgage research firm in New Jersey.
Mortgages made before 1935 typically were three- to five-year balloon loans. They were due in full at the end of the term and had to be refinanced. They were also limited to about 40 percent of the value of the house, as opposed to today’s loans, which routinely cover 80 percent to 100 percent of a house’s value. From the late 1930s to the mid-1950s, longer-term loans were made, but they still ran only 15 to 20 years.
AI is our best hope as a new source for widespread low-cost labor. I propose a trial in which chatGP replaces US Congress. Or we can try monkees.
Micky Dolenz for president!
So-called AI uses vast amounts of energy to get a worse result than humans. ChatGPT should be called CrapGPT. It’s not viable as low cost labor.
One practical example: Canada.
Prior to the current year Canada would print 30k for each home “owner” and say there was no inflation as housing wasn’t fully included.
Now the Fed has pulled the rug on that game, to remain solvent they have had to increase immigration levels, now taking in 1,000,000 people they didn’t pay to raise or educate per year.
How’s that for a country that can’t function with its own “growth” when they can’t fudge the numbers?
Buyers say they won’t accept rates above 5.5%. But what they mean is, we won’t accept rates above 5.5% at *these prices*.
Good points, and I agree. Welcome to the new normal after the recession
“What’s wrong with these people?” What’s wrong is they can’t afford a home with over a 5.5% mortgage rate because the prices of homes have gone up too high. They all have it backwards. Mortgage interest rates are not the problem, but prices are.
Agreed. Sellers are anchored to absurd expectations, form an absurd era.
Spot on. A new inflation target would be way more disruptive to asset prices. Would setup a wave of defaults almost immediately because all HTM assets would register a steep decline.
It would also un anchor inflation expectations such that keeping 4% target would become impossible and the target would have to further raised and so on.
see two options
1. As the wolf says, relatively high inflation and interest rates for a long time
2. Broken economy, severe recession, and once again QE and near-zero interest rates.
The third option is a black swan and no one knows what will happen next
It black swan ,will be blamed on AI,electrical shutdown,oe WAR.
Or maybe the US will adopt the yuan as its national currency and the dollar will disappear…
What a great thesis and i completely agree. Wonder how the federal debt would play out in that scenario .
Higher long-term inflation rates aren’t quite the panacea for the Federal debt that some are espousing because:
1. The average weighted duration maturity of US debt is only about five years (meaning the debt must be rolled over fairly quickly – at higher rates)
2. Most government programs’ outlays are linked to COLAs and inflation dependent expenditures
3. Huge possible disruptions in markets and the economy if inflation were to run hot for long, thus lowering tax revenues.
The Fed knows all this, which is why it is vowing publicly to maintain the 2% goal (and with the 10-year at only 3.5%, the market is wholeheartedly believing what it says)
So what about equities, bitcoins, consumer spending, etc.? They aren’t getting the memo.
Just to be very, very clear: we did have inflation from 1997 to 2020.
Pull up a graph of house prices versus wages. Housing prices rose far faster.
Western governments issued near unlimited credit against housing from 1997 onwards, they also calculated inflation without properly reflecting housing costs.
It is not correct to state that inflation is a recent phenomenon. Unless you uncritically consume the government definition of inflation. I don’t because I’m sentient.
There are different types of inflation. This article is about “consumer price inflation” (measured in the US by the PCE price index, CPI, etc.), as I pointed out in the first paragraph.
There is also house price inflation, asset price inflation, wage inflation, wholesale and producer price inflation, grade inflation, etc.
You’re conflating consumer price inflation with house price inflation.
1) Prop 13 : if enough of u stay in your houses RE taxes will stay
the same fifty years from now, in 2023. Most CA home owners survived the 80/82 bust, the S&L bust, the dot.com… but stayed in their houses.
2) Most mortgages are between 3.25% and 4.5%. There are mortgages
below at 2.5% and above at 6%, 7%, 8% on the long tail of the chart. If enough home owners stay in their houses they will short supply.
3) In 2020 we were fighting a BAT. Interest rates rose from their dark caves, infected SVB bank. People are scared of a spreading infection.
4) JP : a lightweight recession to fuel people fear, to sent the 10Y% and CPI down and to help the banks.
Here’s all I care about: at 5% inflation, my grocery bill will double inside 14 years or so, but I guarantee you my wages won’t.
Anyone “clamoring” for 5% inflation better be ready for social unrest, anxiety, anger and political instability to increase exponentially.
Hell it doubled in 2 years ,get your head out of the sand
Bruh, I know. I was talking about how bad a “measly” 5% would be, but we ALL know it has been, if anything, under-reported these last few years.
Hopefully SS will keep up with their annual inflation adjusted increases
My largest expenses are childcare, housing, food, and education, in that order. With the exception of food, this idea of living with 5% inflation does not feel at all foreign to me.
I wish the Bank of Canada would tell the truth instead of trying to save the housing market. Tomorrow April 18th like clockwork the core CPI in Canada will fall month over month the converse of what happened in America. Of course inflation will also come in way under estimate as the the estimate (forecast) is always too high to start with. I’d like to know where they came up with the 5.4 percent forecast?
What is the “true” data the Fed (and other central banks) are using???
GI=GO. We are only going on what we know. What data we have. So, our conclusions could be based on inaccurate data.
In this day and age of AI, I wonder what kind of conclusions the central banks are compiling with their data.
Will we see gasoline prices “controlled” to $2 a gallon? Will central banks continue to buy debt (unlimited)???
Who knew the Fed had the (legal) means to do QE in 2007????
What’s next? Who knows.
Sure, the data we look at makes no sense. I’m a believer that what the Fed looks at makes even crazier sense.
Personally, I see a great deal of pain ahead.
In 2009, gold was rising. Why? People didn’t believe the Fed could pull off QE. But, they did.
The world is being Enron-ized. Just move money around, manipulate, cook-the-books with off balance sheet accounting, buy all the debt, add in some MOJO magic and POOF….. 2% inflation.
It’s good to be King.
We collectively are staggering forward in the dark, and every few years, re-papering the financial system. There is a lot of new hocus-pocus each time around, but that essentially is what it is. We all owe ourselves and each other. names and numbers get flipped around by technocrats and somehow it all keeps stumbling. I’m surprised I have anything like a decent standard of living and quality of life. I’m surprised it has not all collapsed into French Revolution/Roman decline/WWI, etc. But it hasn’t, in this lifetime.
The Financial Industry just wants the markets to go up. They don’t care how. They want the bubble back, with the inflated churn and fees it produces. They need the Fed as someone to blame when the markets fall. Whatever bad consequences of all this credit and money printing will be the Fed’s fault, they have become the industry’s permanent whipping boy and scapegoat. We need people thinking of the future not just the current trading day or the end of the month client statements.
The rich have stacked up enough capital to move laterally into whatever. They don’t need that particular market structure, but continue to see big gains possible there, if the Fed can be arm-twisted. I saw the Fed arm-twisted recently enough to still be suspicious.
Exactly! This has been my view all along. The only thing keeping rates down is the inflation fight itself. Being successful or not in that fight is irrelevant. A ten-year yield 3.50% of makes sense only if the real rate is say 1.25%, the expected long-term inflation rate is 2.00%, and the term premium is say 0.25%. Abandon the inflation fight and the expected long-term inflation rate goes from 2.00% to 5.00% and the ten-year goes from 3.50% to 6.50%. Our masters cannot abandon the inflation fight or the %3$! hits the fan.
If the Fed abandons the inflation fight then the Fed can use yield control to keep long-term rates in check but then we are back to QE infinity.
Why is 2% acceptable? Is it to trick workers in declining industries into thinking they are not getting a pay cut when they don’t get a raise? Is this beneficial to the economy?
I think a better inflation target is a range from -1% to 1%. There is no good reason for the currency to be systematically de-based, even a little bit at a time.
I mean, that would do it, sure. Not certain we want to wish for the instability and chaos that would unleash though…
What is the effect of a headlong migration of humanity across the southern border on inflation?
They all must be able to get Food, Shelter, a means to Income, Education, Medical Care etc….
Inflationary, of course.
Or they work long hours for sub-minimum wage, no benefits, and that is deflationary. I don’t know about now, but some years back here in SoCal one could easily see the added value. But I would be open to see a serious study, versus politicized hysteria.
Yes, except that they and their children cost society a fortune in education, health care, and housing costs, among other things.
The idea that $6/hr tomato pickers are deflationary is a joke. It’s a way of industry privatizing the benefits and socializing the expenses.
Like a waitress making $2.13 a hour /and tips
I’d note that the Federal Government’s interest payments would rapidly balloon if inflation expectations rise up to 4 or 5% over the long term.
An average inflation rate of 4-5% would mean longish-term treasuries at 8%. US debt held by the public is roughly 25 trillion, so interest payments on the order of 2 trillion a year.
The entire US Federal Government revenue is currently 3.5 trillion. Somehow I’d expect roughly 2/3rd of the revenue being interest payments to break something.
One of the most salient causes of the revolution in France in 1789 was when Louis called the Estates-General in order to solve an economic crisis; the crisis being that the monarchy could no longer service the interest payments on its debts, much less the principal. So there’s a precedent for what this kind of maleficence does.
If one looks at the long-term causes of that very same revolution, one might be shocked at the parallels.
I’ll be over here in the corner with my popcorn.
Coming soon to the UK.
>>> we’ll just closely monitor
Let’s hope they don’t move back into that lane. Their “closely monitoring” for a whole year before actually doing anything is part of the reason we are where we are.
What we need is bigger cajones, not “closely monitoring”.
I want my 15% CD. Just for the experience.
Hello everyone! Quick econ question – how is it possible to have total real estate assets = 40TT and stock market = another 40TT and maybe another 40TT for all other assets = say at least $100TT when there is only $21TT in circulation (M3 Money)……….does this mean the gov HAS TO print more $$$$
That is the problem with summing the market value of assets. The assumption is that each asset will be sold in an orderly manner and that not all will be sold at once. If all were sold at once, the values would be lower. I expect we may see that soon with respect to the stock market…
You’re confusing money supply (forms of cash held in various accounts) with all other assets out there.
M3 includes M2 money plus large time-deposits, institutional money-market funds, short-term repurchase agreements, and larger liquid funds.
M2 = cash people have on hand, money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as CDs.
And instead of trying to understand or look up the basics, you come up with crazy theories to explain the silly nonsense circulating in your head.
@ Wolf – I may have missed it but you had previously chronicled the leverage built up in the markets, with the message that it was out the wazoo and may eventually cause a huge unraveling. Any sense if we are approaching that tipping point? Because margin rates are shooting up as well.
In this kind of environment the only real safe investment is bitcoin. It is regaining its value now. Gold is a lousy alternative because the bullion banks can sell unlimited amounts of paper gold driving the price down. Meanwhile bitcoin is left alone to rise as the USD falls.
“Meanwhile bitcoin is left alone to rise as the USD falls.”
LOL. Bitcoin lost 55% against the hated dollar. But go ahead, believe in bitcoin if it makes you feel better.
In the past six months during a period when the USD was slumping, bitcoin has increased slightly over 50%. In the same time frame gold is up 20.63%. So as a store of wealth bitcoin is showing a better track record than gold recently.
I am thinking that what hurt bitcoin was the collapse of FTX and the associated fallout.
What hurts Bitcoin is so many people think it’s a quick way to get rich, among other things.
As for Bitcoins relative rise in value lately, I think you are mistakenly making correlations into causations.
I’ve still yet to hear how Bitcoiners think the rise of cryptocurrencies will survive a) true government interference, and b) the era of expensive and scare energy inputs. Feel free to educate me.
…FTX: ‘First to Xpire’?
may we all find a better day.
lol! Using a six month time-frame to make point? Gold is at, or near all-time highs in every major currency, while BC is <50% of its ATH.
Escierto did you know banks created a futures market for bitcoin? So am I supposed to believe the banks would use the gold futures market to manipulate the price of gold, but they won’t use the bitcoin futures market to manipulate the price of bitcoin?
And why would it be a problem if the banks use futures to lower the price of gold? Wouldn’t that be an opportunity to acquire an asset for a low price?
Sure, you can buy gold cheap. The problem is the government and their accomplices, the bullion banks, will never let gold rise significantly. Bitcoin is not perceived as a threat to the monetary system so there is no organized effort to prevent its rise. Over the past six months it’s evident that bitcoin is a better store of wealth than gold. Will that remain true however?
“Bitcoin is not perceived as a threat to the monetary system so there is no organized effort to prevent its rise.”
That should tell you something about how seriously they take Bitcoin’s true influence.
ok Escierto, I remember when gold was ~ $272 / oz (2001). Since it now trades over $2000 / oz how would we say the bankers didn’t let it increase?
Oh nevermind I see you are evaluating only the last 6 months of history.
What happens to your bitcoin when the power goes out?
Leave the country and everything and everyone behind. The grass is much greener on the other side!
Yes, you can always got to Argentina, a beautiful country with great food and wine – and inflation is 104%, LOL, and so prices, rents, etc. are noted in dollars because the peso plunges so fast that it’s a waste of time to mark prices in it.
I hear Venezuela is also nice.
Wolf, you have been a steady voice saying that the Fed will not cave to the pivot pushers from WJS, CNBC et al.
The fact that wrote this post says to me that you now believe the weight of the pivot voices might be getting to Powell.
Not to mention that, as the 2024 election gets closer, Powell will have the additional pressure of pleasing his betters.
I feat that it’s David Sacks’s and Bill Ackman’s and Peter Thiel’s world now, and we just live in it…
You misinterpret the reason why I wrote this article. Nothing changed in my mind.
Rates cannot rise forever. Rate hikes eventually end. We all know this, and I’ve been saying this for a long time. And the end of the rate hikes is approaching. There are no rate cuts on the table this year. And if inflation proves to be nastier than expected, rates might be hiked further in 2024 or 2025.
I wrote this article because there were many comments here about the Fed caving on its target and markets jumping because of it. Each time I got one of those comments, I had to spend time explaining the consequences of such a move. But comments and replies are not the ideal forum to explain the complexities of it all. So I wrote this article, and in the future, if I get a comment on this, I will just link this article. Saves me a lot of time, and it provides a better answer than a quick comment.
Thanks Wolf for taking time to reply to comments.
It takes a lot of energy and patience to do this.
I agree, rates can’t keep hiking.
The interesting thing is: stock market is pricing in rate cuts by Fed in q3 and q4 of 2023.
The economy won’t “muddle through”. We will rapidly find there are no stable regimes of inflation in the 4-5% range- it will gyrate wildly between 10-20% and short bursts of dis/deflation during deep recessions.
One more thing to consider is the generation gap. For baby boomers and generation Xers, they are mostly good where things at. For gen Y and later, they are looking at how bad things are for them. Can’t afford to own a home, barely keep up with inflation. At some point, they will throw up their hands and pick the pitch-forks.
“they will throw up their hands and pick the pitch-forks.”
No, because they don’t even know what pitchforks are. You should have said: “they will throw up their hands and post videos on TikTok.”
The policy makers know that the new generations has been emasculated by these digital onslaught and can’t voice their anger in any meaningful way. Thus these policy makers are emboldened to look and pillage the country to their benefit.
The real scary thing is that these “new generations” will soon be the policy makers.
Oh, but I think a bunch of them ARE showing up inarticulately with AR-15s every week. Their gamer chat and gang-banger buddy groups are forming all kinds of little pools of mischief. And I think it links to a sense of futility and disconnectedness to a future, as we knew it growing up.
Unfortunatey I think you’re spot on.
My seven kids are all millennials. They all make huge salaries and live in palatial houses. I don’t begrudge any of them their wealth of course but the idea that Millennials are all starving and living in cardboard boxes is ridiculous.
Nobody ever claimed that “all” Millennials are starving and living in cardboard boxes.
Your confirmation bias means nothing since we’re talking about society as a whole. Look up the median annual salary and get back to us.
I agree, People live in their own bubble!
Huge and palatial…awesome! Let’s have some lobster stuffed with lobster!
“At some point, they will throw up their hands and pick the pitch-forks.”
Only if the Khardashians tell them to.
Nah, millennials and Z-ers will pick Socialism, because blaming Capitalism for cronyism and corruption is an easy narrative. Can’t blame them though.
So that’s why the 10-year yield went down so far when SVB failed. Bond buyers bet the Fed would reverse course. They made the same bet in early November when the Fed raised 75bp but many thought it would be 50 or forward guidance would soften. Now the speculators have 2 strikes. I wonder if they will fall for it a third time? We will see when the next headline bankruptcy happens. Today the yields are going back up but still in the mid 3’s.
The gig was always going to end when the Fed lost control of interest rates.
Which the Fed will. Markets set rates, not the Fed in the long run.
The only reason anyone buys negative real interest rate bonds is because they are mandated to.
But mandates will change because buying bonds with negative real interest rates is guaranteed to lose money.
When investors stop buy US debt, the Fed will have to monetise, which underwrites inflation.
Annual US debt cost currently $800 billion (as much as US Defense) and rising.
The gig is up, America.
People buy bonds with negative rates with the expectation that it’d go more negative.
Long rates e.g. 10 Y are more or less dictated by long term economic growth hence you see 10Y yield going down
Fed has some control over long bonds via QE. Fed controls the short term duration 102 years I guess
Does anyone know the names of these people with the Megaphones (shouting for lowering rates and accept inflation as normal)??
Wall street cry babies steeped in assets are the ones screaming for this along with media..
Accepted 4-5% inflation would destroy retirees, savers, and low income earners.
Get Real. None of the elites give a squat about retirees, savers, and low income earners. They are just collateral damage.
They will when they realize that hungry, desperate people don’t care about laws.
That’s the thing these people don’t understand. The police aren’t going to protect them. Not when SHTF.
That’s why we have UBI in place in many forms .
It’s already begun.
Sign me up einhal,they already have plans in place . Get on their private jet go to New Zealand and other multiple places .Leave peasants to massacre each other .Hope they have a food supply . Cramer bought a farm I believe in South Carolina with crypto winnings,knows how to raise veggies .might survive
New Zealand is a series of islands that lacks some important natural resources. It’s not going to be able to be its own self-sustaining bubble of prosperity.
I didn’t say rich were smart!
Middle class is already in the process of getting wiped out in the last few decades or so.
Did we hear any outcry anywhere ?
Same thing is gonna happen to everyone but the rich and elite unless people really wake up to this but I am sure.. people won’t
“…but I’m sure if I just keep shoving my pennies into this machine it’ll hit, then i’ll be rollin’ with the big dogs!…”.
may we all find a better day.p
The rich and elite will get theirs soon enough. They live in a bubble and are blind to reality. They think that they just need to build gated communities and survival bunkers. Okay, but who will provide food and services to them? They will be dragged from their limos and helicopters and paraded through the streets to their grisly ends.
I washed Wolf’s mugs in my dishwasher. Didn’t notice anything abnormal. Logos looks like new.
Thanks for the info SC. I collect all sort of items and have a fear of the dishwasher. Would think you used the top rack and may try that in the future.
Wasn’t the FED controlling the long-term yields by QE. Couldn’t they do that again, even if Inflation stays around 5% ? If they stayed not too hot or too cold with QE in respect to creating further inflation couldn’t that keep the car on the road at higher inflation rates but reasonable long-term yields ?
No they could not. Their mandate is price stability (of some sort). They could do QE when inflation was low. They stopped doing QE when inflation began to surge. And they started QT as inflation was raging. They cannot do QE with raging inflation. People need to stop fantasizing about restarting QE despite raging inflation.
Just a novice here but what would happen to banks holding bonds way less than 6-7%
Why not Wolf?
I think Marco is spot on as long as liquidity is created with the correct strategy and can be directed into the right windows.
Also, the Govt can kickstart healthy bank credit creation by simply slowing or stopping the issue of Treasuries and simply fund deficit spending by borrowing from banks through non-tradeable loan contracts which don’t have to be marked to market.
This encourages bank credit creation in a much smarter way. Furthermore, if the Govt stops issuing bonds the bond market is strong again too.
The larger bond-buying entities like pension funds are not helping create liquidity in a downturn. If they bought bonds from banks instead, money is being created for healthy real GDP transactions boosting nominal GDP and tax revenues.
Richard Werner has empirically proven that the correct type of QE directed into the real economy is not inflationary anyway.
Also, the main culprit feeding inflation is the way liquidity is directed into asset bubbles and excessive consumption.
As much as I loathe the thieving Fed cabal they are not the main problem in this instance – rather it is the commercial banks that create >90% of the money supply when they create digital money out of thin air by making loans and then promptly funnel this into liquidity for the financial economy (FIRE).
Raising interest rates actually feeds inflation until the hikes have become so onerous that this actually debilitates the real economy anyway – the very sector that could achieve healthy real growth without being the least bit inflationary.
Many of you here appear to have bought into the false meme that there is an inverse relationship between interest rates and inflation.
Also, the narrative on this site appears to have the tail wagging the dog. IOW economic growth happens first and interest rates in turn follow along – this is the polar opposite of what the status quo bankster-dictated economic rubbish promotes.
It’s all noise and distraction so that they can get on with the job of fleecing and impoverishing Mainstreet.
Also, the discussion here seems to have an overwhelming fixation with supply-side economics rather than the correct strategy of addressing inflation, interest rates and UE from the demand side.
Higher growth allows higher interest rates to be sustainable without crippling an economy that is based on a healthy industrial capital model. This then revives a savings culture where leveraged deposits can be advanced into local economies where strict moral hazard disciplines come back into play.
Lower growth in the real economy leads to lower interest rates because that’s all that is sustainable, especially when the average total debt of US taxpayers averages out at around $800K per person.
Many here appear to be trying to find strategies for saving a raging FIRE economy – ain’t gonna happen – that ship sealed at least 15 years ago.
The tragedy is that none of what I describe above is new theory – indeed much of it goes back hundreds of years.
I studied economics in the early 70s and it turns out that the entire course was based on completely false maxims that are designed solely to protect the wealth of a tiny number of filthy rich oligarchs.
To this day Economics remains the most despicable “science” on earth. It is purely designed to eliminate the middle class and impoverish our labour resource.
The world lost its way in 1913 – since then we changed increasingly from industrial capitalism into neo-feudalism. The imminent meltdown of the entire Wester casino facade is the inevitable result.
Inflation : L1 is a downtrend line coming from 1920 to 1947 highs.
L2 is a parallel line from 1990 to 2008 highs. The CPI landed on L2.
How about a zigzag to 11% CPI, for fun.
Bull’s eye, Wolf. The Fed’s credibility would be shot … the last thing the already struggling USD needs. These well-megaphoned voices are not exactly representative of the average American likewise struggling to make ends meet … they’re overwhelmingly concentrated in areas like Wall Street, Silicon Valley, Washington … interests on the receiving end of the inflationary wealth transfer conveyor belt. Crushing inflation would derail their gravy train. With so much at stake, it’s not hard to concoct reasonable sounding arguments for still higher inflation.
inflation is one of the most destructive economic forces capitalism encounters.
The time horizon of the trading desk’s policy has been 24 hours rather than 24 months.
I.e., monetarism has never been tried.
Dan Thornton: “Today ‘monetary policy’ should be more aptly named ‘interest rate policy’ because policymakers pay virtually no attention to money.
1971 to 2022:
Average annual change in CPI is 4.01%.
Average annual change in Core CPI is 3.90%.
Average annual federal funds rate is 4.86%.
Average weekly 30 year fixed mortgage rate is 7.76%.
Last I looked, we are still here.
I cannot get excited about an average annual inflation rate of four percent over time, since that is, ahem, average.
As for extremes, in 1980 CPI change hit 13.5% , Core CPI change 12.4%. The rates in 1983, three years later, were 3.2% and 4.0% respectively. Note to Fed: follow Volcker’s lead, quit wimping out. Ignore Wall Street.
1) Wolf’s analysis that “long-term bond yields will spike to account for that higher inflation rate” would have been true in a pre-QE world. But as long as the Federal Reserve doesn’t explicitly take QE off the table from its recession-fighting toolkit, Wall Street will always expect it to be used in the future, and try to front-run it, as they’re doing right now. So we’ll instead end up with the worst of both worlds: high inflation, and bond yields that are too low to compensate for inflation.
2) Raising the inflation target right now would produce a heavy political backlash (especially under a Republican Congress) and further erode the Federal Reserve’s credibility. Due to this, no one on Wall Street is expecting a formal target increase, at least not in the current cycle. Instead, they expect the Federal Reserve will continue to publicly commit to the 2% target while finding excuses to avoid further tightening (bank failures, “long & variable lags,” etc.) After all, there’s a target number, but not a target timeframe – and as long as inflation continues trending downwards (a big if) it’s politically easy to justify giving it more time.
Wall Street is a lot smarter than this site often gives them credit for.
Wolf – I need a bigger mug. With a new logo after everything does go to heck in a straight line.
I bought CDs – and we had a banking crisis.
I cashed out some CDs – bought treasuries and now the talk is accidental default due to obliviousness.
There is no more investing. Only fast paced trading (gambling).
You mean you bought a CD, which triggered the banking crisis, and then you bought some Treasuries and that might trigger a US default? WOW, this financial system is a lot more unstable than I’d imagined 🤣❤
IMHO real yield (nominal yield minus inflation) of long-term Treasuries must be at least zero in order for USD to keep its status of worlds reserve currency. Should this yield become negative, various countries would start getting rid of USDs, which would result in US government becoming unable to finance its colossal budget deficit and all sorts of spending programs. IMHO from government’s perspective, this outcome is worse than stock market and/or housing market declines. So personally I would expect Federal Reserve to continue its fight against inflation, even at the cost of extensive markets declines.
” Should this yield become negative”
Its been negative for around 14 years.
Just a novice here but what would happen to banks holding bonds way less than 6-7%
I’m not a finance dude just curious.
Another of your outstanding articles. My question is: could the Fed not increase QT above $95 Billion per month, say double it to $190 Billion, to flatten the yield curve and bring long term rates up to 5%. This would put an end to the market’s current obsession that the Fed will be forced to decrease short term rates by the end of the year. They could do this while not raising the Fed Funds rate, and significantly decrease their balance sheet.
The 2% target seems to be more of a floor with inflation running above that by a few points. If we set 5% as the baseline, then we will end up at 7% on average. Exogenous shocks could give us 10-15% over short periods.
Asset prices are hardly collapsing for now and everyone is already whining. Of course, in a bubble if it doesn’t go up, it is certain to go down very hard.
Inflation assumes that consumer behavior doesn’t change according to prices – i.e. that you buy the same goods and services in the same quantities. While this is helpful to measure change over time, it discounts the fact that a consumer will substitute a cheaper item, or cut back all together when they can’t afford items. If you could somehow measure change in behavior, I’m guessing that you would find that “core inflation” has already shown a more drastic decline than the headline number.
Substitution is famously included in the PCE price index, which is the index the Fed favors.
Substitution is included. Government inflation also includes hedonics, the idea that things are not more expensive because they are better.
So, your laptop or PC is more expensive but it has more RAM, an SSD and faster processor. Never mind that it won’t run any of your old programs or that your old computer can’t run any of the new programs (including the operating system itself). Same logic applies to cars. They cost more but you get 47 cupholders, heated spare tire well, bluetooth hubcaps and 92 inch screen in the dash.
I studied economics (twice for my sins) and was taught that capitalism and mass production will lead to lower prices for things. LOL.
Curious if folks could help me understand this one…why is the 1 month treasury currently at 3.8% when fed funds is at 4 75%? Having in a money market fund would yield more than the 1 month treasury.
Yes, it’s funny. And it’s all demand based.
Today, 1-month yield = 3.89%; two-month yield = 5.04%, LOL
Huge demand for short-term as no one wants to look in a 5% yield when the Fed is going to raise to 25 basis points in TWO WEEKS to get yields to 5.25%? So they’re all trying to put their money into the shortest term, and two weeks from now, they’ll buy something with a 5.25% yield… that’s what that looks like to me.
If you buy a one-month maturity today at a 3.89% yield and hold to maturity a month from now, you WILL have a tiny capital loss on the security, but you get some interest, so you still come out ahead but less ahead. But then you get to buy the 5.25%-er with a longer term, such as the 1-year yield that then might get close to it, and that’s a nice-looking bet for some, it seems.
But isn’t it true that investors commonly purchase tangible assets such as real estate to hedge against inflation? Why is that not true this time?