“Rates have been extremely low for a long time — it’s hard to know how many investors and companies are truly prepared for a higher rate environment.”
By Wolf Richter for WOLF STREET.
Jamie Dimon, in his letter to JPMorgan Chase shareholders, was shaking up the internet a little this morning when he discussed the range of scenarios he envisioned for inflation over the longer term, and interest rates over the longer term – and the potential causes.
But he also cautioned about running a business based on “economic prognosticating.” He said: “Instead, we look at a range of potential outcomes for which we need to be prepared. Geopolitical and economic forces have an unpredictable timetable — they may unfold over months, or years, and are nearly impossible to put into a one-year forecast. They also have an unpredictable interplay: For example, the geopolitical situation may end up having virtually no effect on the world’s economy or it could potentially be its determinative factor.”
So here’s what Dimon said in his letter about inflation, interest rates, and QE/QT:
“All of the following factors appear to be inflationary:
- ongoing fiscal spending, [“…occurring in boom times – not as the result of a recession – and they have been supported by quantitative easing, which was never done before the great financial crisis.”]
- remilitarization of the world,
- restructuring of global trade,
- capital needs of the new green economy,
- and possibly higher energy costs in the future (even though there currently is an oversupply of gas and plentiful spare capacity in oil) due to a lack of needed investment in the energy infrastructure. “
“Interest rates looking out a year or two may be predetermined by all of the factors I mentioned above. Small changes in interest rates today may have less impact on inflation in the future than many people believe.”
“There is also a growing need for increased spending as we continue transitioning to a greener economy, restructuring global supply chains, boosting military expenditure and battling rising healthcare costs. This may lead to stickier inflation and higher rates than markets expect.”
“It seems to me that every long-term trend I see increases inflation relative to the last 20 years. Huge fiscal spending, the trillions needed each year for the green economy, the remilitarization of the world and the restructuring of global trade — all are inflationary. I’m not sure models could pick this up.”
Prepared for “interest rates of 2% to 8% or even more.”
“Therefore, we are prepared for a very broad range of interest rates, from 2% to 8% or even more, with equally wide-ranging economic outcomes — from strong economic growth with moderate inflation (in this case, higher interest rates would result from higher demand for capital) to a recession with inflation; i.e., stagflation. Economically, the worst-case scenario would be stagflation, which would not only come with higher interest rates but also with higher credit losses, lower business volumes and more difficult markets.”
Beware of 6%-plus long-term rates in a recession.
When purchasing First Republic in May 2023, “we stipulated that the crisis was over provided that interest rates didn’t go up dramatically and we didn’t experience a serious recession.
“If long-end rates go up over 6% and this increase is accompanied by a recession, there will be plenty of stress — not just in the banking system but with leveraged companies and others.
“Remember, a simple 2 percentage point increase in rates essentially reduced the value of most financial assets by 20%, and certain real estate assets, specifically office real estate, may be worth even less due to the effects of recession and higher vacancies. Also remember that credit spreads tend to widen, sometimes dramatically, in a recession.”
“Rates have been extremely low for a long time — it’s hard to know how many investors and companies are truly prepared for a higher rate environment.”
About QE and QT (they’re risky):
“Quantitative easing is a form of increasing the money supply (though it has many offsets). I remain more concerned about quantitative easing than most, and its reversal [QT], which has never been done before at this scale.
“Quantitative tightening is draining more than $900 billion in liquidity from the system annually — and we have never truly experienced the full effect of quantitative tightening on this scale.”
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QT is operation vacu-suck
And we all know that moment is coming where someone at the Fed switches the giant control lever from suck to blow.
We’ve already had lots of predictions of this type here over the past 2.5 years:
1. Late 2021, when the Fed started tapering QE: “The Fed will never end QE”
2. And after it ended QE: “The Fed will never do QT.”
3. And after it started QT: “The Fed already ended QT because…”
4. And after QT got bigger: “The Fed will end QT next month because…”
5. Then: “The Fed will never go below $8 trillion because…”
6. And now at $7.5 trillion, “The Fed will start printing again because…”
That BS never stops. 2.5 years of this copy-and-paste BS and still going strong.
Superb distillation of Jamie Dimon’s missive.
Pure wisdom served up fresh daily.
I agree 100% with you.
No one thought 2 years ago that FED rates would be above 5%.
I am one of the very vocal critic of FED. Of course my voice/opinion means nothing.
At the same time, it didn’t dent any of the asset markets .
Infact the financial conditions are loosest ever.
I don’t care about any other asset markets other than residential real estate as it has impact on common Joe.
Most of my young friends earning 150K plus , in So Cal are prices out of home ownership, thanks to FED.
My respect for FED would increase multiple times if they’d make home ownership a dream come true for average Joe on the street.
But for now, I feel, FED works for rich people and asset owners like me.
Home sellers are holding on to their prices think low rates are coming.
I met a realtor, who was scaring everyone that this is the best time to buy home because of high rates, as rate cuts are coming, thus producing lower mortgage rates and in that case, home prices would go up!
It’s called MMT without the taxes to reduce inflation. Instead, we get QT which isn’t nearly as effective.
Really enjoyed this one. I like a holistic approach to comprending the state of the economy as so many pieces can’t get locked in on only one of them. It tended to present a glass half empty look but in my totally useless opinion that is how I see it. Climate, Middle East, South China Sea, immigration, anti-globalist sentiment, and so on, are hardly going anywhere.
I like you, Glen
I like you too Glen!
Did you glen lovers know that diamon is advocating for increased spending to save the planet? And also more money to military to blow up planet.
Home Toad,
While flattered by the compliments not clear how that relates to your comment.
It adresses wolfs article at hand Romeo. The lover were only a door for me to enter. But if I may, spending and going further Into debt is as bubba would say…for prisoners and fools.
Home toad,
You are quite the whirling dervish. A moth to a flame!
Wolf street is the flame, we can be moths or just enjoy the flame.
Enjoy your company.
I’m now fairly certain Home toad (and bubba) drank the fox-aide, could be wrong.
Very likely Calvin-aide, and Aristotle/St Augustine-aide even before that. Guess they taste really good to a kid and are easy on the mind and belly.
Maybe in the gut-brain axis sense, too? Probably too much guessing on my part.
I Hated (not really, but I’m trying to make this point strongly) Dimon since he bought Bear Stearns for less than the Manhattan Headquarters was worth 15 minutes before the Asian markets opened and then was somehow declared a hero for it, (Buffet performed a similar “rescue” to help all of us) but like the equally nasty Paulson and Geitner he IS in a position to know “things”.
I have no idea what billionaire’s agendas are….they are mentally ill, though, for sure, I know the type well, honest.
“Dimon since he bought Bear Stearns for less than the Manhattan Headquarters”
LOL. JPM took on ALL of Bear Stearns’ debts and obligations, hundreds of billions of dollars of them. Taking on that debt is the price JPM paid.
Didn’t hurt JPM a bit. Believe they are the biggest of all big commercial/investment banks now. And why the brinkmanship if not to get a better deal…nobody else got Bear Stearns.
And it didn’t go Lehman on the credit hole pluggers.
He wasn’t advocating for more green energy spending and military spending as much as pointing out that it is coming like it or not.
Green energy is going to make up a large portion of the world’s future energy needs. Like it or not.
Unfortunately the world is more military oriented (again like it or not). There are quite a few bad actors who think they can take what is not theirs by force. Unfortunately a large part of the civilized world is willing to look away and give these bad actors freedom to act in the name of America First or whatever country we are talking about.
They seem to think that using their xenophobia to ignore the fact we all live on the same planet and the bad actors are not going to stop. If Putin takes Ukraine than the Baltics will be next. After China takes Taiwan it will attemptbto exert more control over the Southwestern Pacific.
The longer they are ignored, the stronger they grow until they are knocking on your door.
I know some people get angry at people who tell them news they would prefer to ignore, but burying your head in the sand is not an effective way of living life.
Yeah, I was struck by how Dimon included the capital needs of the green transition but not the effects of climate change itself. If we have shifting weather patterns and more weather disasters, that reduces crop yields, increases money that must be spent on disaster response and prevention, and yields freak consequences like drought reducing the traffic allowed through the Panama Canal.
All these effects are inflationary.
That is beyond silly. Warmer weather indisputably produces GREATER crop yields… not less. Try growing anything in winter (outside of the grow room in your basement) and see what happens.
And there is ZERO evidence of global warming producing “more weather disasters.” In fact following the 2005 hurricane season NOAA put up on its website a statement alluding to global warming producing more (and worse) hurricanes… only to take it down a couple of years later as we entered a quiet spell for tropical cyclones that lasted over a dozen years. Freak weather occurrences are just that… freak weather occurrences. One curious example right now is the full reservoirs that California is experiencing… only an idiot would make plans based on that being likely to continue well into the future.
There is zero evidence that you have the mental capacity to understand complex subjects.
There is evidence that you love to be right more than you love the truth.
“Climate change” and “global warming” are double-speak and purposely hollow because they are meant to keep people from discussing “Ecological Destruction”, massive ongoing pollution, declining fertility, fucking plastic everywhere, massive drop in physical mass of living organic matter on the earth (plants and animals and ocean life getting wiped out). Seems like you are eating from the buffet that the people who think for you want you to be eating from. The whole point is to generate enough people like you so as to drown out those with the courage to speak up about massive industrial, consumer level, and military generated pollution and toxins and destruction of the environment, our own communities, and that of the future generation(s).
greater yields during warmer weather….
Not quite true. I am an agricultural economist and farmer.
Warmer weather can also cause crops to burn up.
Farmers decide on crop varieties based on certain expected weather patterns for their area. When the weather is not what was expected, the crops do poorly.
Its not that simple, especially for the short run.
Maybe Dimon also considers mitigation of climate change as a capital need of the new green economy. Or he’s deliberately a bit vague on this issue, as there are still far too many ostriches like SpencerG around, who can feel the heat but prefer to stick their heads in the sand.
Yes a local weather effect is that a little more heat and CO2 helps crops and trees, but the point is there is a lot more heat and CO2 all over the planet. Bit harshly put by Ronald Reagan but he ain’t wrong IMHO.
Harder to garner facts on a global basis for climate predictions . I personally see no issues with a warming climate seems like coming out of the ice age was a tremendous benefit to humans . Energy and energy production will drive global economic expansion and this will go on for multiple centuries .
…then make sure you continue ignoring the issues that professional climate modelling scientists keep telling us about every year! They do nothing but garner facts on a global basis and have been pretty damn certain for a decade or two what’s coming our way if we keep wanting to grow our economy like we have been. At least influential bankers like Dimon are now factoring the needed transition into their forecasts.
Your comment demonstrates you do not understand farming. Warmer weather does affect yields. At the very least, warmer weather requires more water since more of it evaporates. More importantly though, hotter weather can make crops burn out or go dormant and not grow.
Crops have specific ranges of weather and temperature they grow best in. Hotter weather disrupts that.
As for your comments about hotter temperatures not affecting catastrophic weather events, it is clear that you are only reading things that reinforce the view you want to be true, because it is far more complicated than you are making it.
Seeing your sad attempts to minimize the effects of a warming planet I am willing to bet a decent sum of money that 10 or 15 years ago, you were one of the people fighting religiously against the fact that the planet was even warming. I bet many of your posts on the subject were about hockey sticks and such nonsense. Now that ship has sailed, you just pretend those posts are lost and you have fallen back to the next trench where you are going to make a stand and deny the science.
Am I right?
This is honestly an amazing comment. I’m tempted to think that it is satire … hot weather doesn’t hurt crops? Something about NASA’s website two decades ago? Truly top-notch.
MarMar,
A term I am hearing more amongst those I work with is ‘weather volatility’. While plants are amazing for the conditions they can tolerate, rapid swings from cold to hot or the other way around impair the plant’s ability to defend itself and greatly reduce the vigor of the plant. Particularly when combined with other stressors, it leads to greater losses. Examples include drought, extended cloudy periods and/or excessive rain. It is going to be a lot of work to stay ahead of this.
To echo your statement, this will be inflationary.
Beyond your wildest nightmares.
I don’t think he intended to focus on the capital needs of green energy as much pointing out thr fact that there will still be a huge need to invest capital into energy infrastructure for the future regardless if it is green or dirty carbon. It is just also a fact that most of that capital will be in green energy rather than dirty carbon because green energy is the future for at least a large portion of the world’s energy needs.
You are spot on and we are going to get used to it for some time. The huge mess we are in will take years to fix. JMO
Wolf,
Have you looked into the volatility of interest rates?
Modeling TLT options (put vs. call) is a way to visualize investor expectations based on how much money people are willing to pay for upside vs. downside rate protection, along with the volume of the bets.
Somewhat surprisingly, volatility has been somewhat muted even though TLT has been in a bear market for such a long time.
You might want to look into the volatility surface for long duration treasuries to add a component to the excellent articles you are writing.
Wanna hear a funny joke?
OTM TLT calls.
Higher rates and sticky inflation will stall GDP and AI euphoria
The Fed is hoping inflation is not as “sticky” as it appears. With the right amount of corrective action, it may prove possible to drop the inflation bracket by a few points before 2026 rolls around. I personally can’t see persistent inflation lasting more than 12 or 13 quarters.
So this rich cat says he doesn’t know much but that he does know 2% or 8% or… whatever! And this cat also observes a dead bird and licks his chops.
So what I take away is…nothing. Wolf is not after a dead bird… everything.
I’m pondering the next build for The Schrodinger’s Cat Model.
Without a doubt, we have a lot of bifurcation in markets, like haves and have-nots, the silver tsunami demographic issue versus millennials super resilience as basic background noise.
Even if there isn’t a technical recession slowly evolving, there’s stress with lower income behavior, while more affluent people totally ignore grocery prices, ad they consume endlessly.
Another clue is affordable housing, where many wealthy people can continue bidding up prices, while most people can’t imagine participating in the game.
The QT quagmire probably exposes financial stress more and more, and if inflation sticks around, that amplifies the stress.
Higher for longer rates seem to be fueling money markets and helping corporations that have cash flow, but, QT doesn’t seem to be doing much to slow down spending from the upper crust — thus, it’s possible that as QT continues, while rates remain higher, inflation will remain elevated, keeping rates in a higher range. I don’t see 8 % as realistic, but maybe the soft landing mandates that rates stay higher for much longer than anyone ever imagined.
Maybe Jamie is just opening that can of worms as a way to amplify the Fed messaging?
I think another thing that will happen in a super bifurcation world is capacity issues, with over production and less consumption. That may be especially interesting with AI just in time perfect models, that fail to anticipate demand.
As the economic pie gets sliced into fatter pieces on one side, then on the other side, the slices are paper thin, there’s probably going to be an interesting disconnect in consumption.
You do know that US inflation has been ~3% or under for more than 6 months, right. You do know that US wages are increasing more than inflation for many months now, increasing the inflation-adjusted income for the broad category of ‘lower-wage-earners,’ right?
The 3-month core CPI has been accelerating for four months and was at 4.2% in Feb. We’ll get March’s figure on Wednesday. Stay tuned.
See no inflation
Hear no inflation
Speak no inflation
“Everything’s fine guys, inflation is magically vanishing and Powell will totally lower rates!!”
@Loren: This is a non-sequitur: “US wages are increasing more than inflation for many months now, increasing the inflation-adjusted income for the broad category of ‘lower-wage-earners,’ ”
Unless we know exactly WHO is getting the “more than inflation” wage increases, AND what their personal inflation rate is (everyone has a different basket of personal expenses!) we do NOT know that “lower wage earners” are better off.
One might even want to pay attention to surveys of “lower wage earners” to see what they think about the matter.
In the face of higher rates and sticky inflation, I sort of expect the AI euphoria / hype to go into overdrive….to try to keep the pump alive.
Howdy Folks. Land of the Free? Home of the Brave Prisoners? That 2 % interest rate is a teaser. We should never be at 2 % ever again. Prepare for double digit rates eventually. If they pull a Greenspan, you will see 10% to 20% rates someday. Get out of debt, live within your means, and always save some of your hard earned dollars…….. Don t be a debt Prisoner…….
I like you Bubba!
About twenty or thirty years ago, where I was born, having debt was unusual. People whispered behind your back that a man with debt is a man without money. It was a shame to be in debt. People saved up for years to buy something in cash.
Today it is fashionable to live on credit.
Strange times!
Howdy Julian. ZIRPed to stupidity. Why save and earn .01 ? Living within your means is Freedom.
“Get out of debt, live within your means, and always save some of your hard earned dollars”
I only confirmed your slogan!
Howdy YEP and agree. Just like to repeat myself. HEE HEE
Probably not at 25%. Either you’re temporarily obtuse or drowning on dry land. How about a jubilee? Some real gas for our inflation!
I love my 3% prison.
“I remain more concerned about quantitative easing than most, and its reversal [QT], which has never been done before at this scale.”
QE has never been done before at this scale, either.
People used to listen to Bill Gross who was wrong as often as not. Obviously higher interest rates take the action away from stocks. Government debt is not an issue, it does not need to be rolled over, but shrinking the money supply, and credit would be consequential. In terms of fiscal probity, the US has a lot of debt issued at dirt cheap prices in an inflationary environment. New businesses have an easier time with high interest rates than existing businesses which borrow to fill orders. This is why HY corporates are doing better than IG. In the 90s when the Fed paused a real long time, this fueled a wave of buyouts, and consolidation. The PC was a nothingburger for productivity. The smartphone has even less gravitas, more panache. One day you wake up and realize you’re paying passive bond investors a premium and you have no real product.
Bill Gross made billions (in not trillions) of dollars for his clients by being right FAR more often than he was wrong. You don’t get to be dubbed the “Bond King” by doing otherwise. He was one of the few who ignored the Cassandras of the late 80s and saw declining bond rates that lasted for 30 more years.
Gross appeared early in the Great Bond Bull Market that started in 1982 and rode it nearly all the way to the top. It peaked in Aug 2020. Obviously, there were some steep drops and gains in between. But it was a 40-year party, and Gross was there for it. That’s just his generation of bond fund managers. But since Aug 2020, bond fund managers are having to deal with a nasty bond bear market that might last for many years.
Jamie has sure kept the top job for a long time (two decades plus). He probably surrounded himself with dolts. LOL!
Well that is a poor game of Chase!
😉
An unmentioned 6th concern that Dimon could have included is the unprecedented total systemic debt/GDP in the US (and around the rest of the globe, too). Systemic debt (as measured by McKinsey Global Institute, Debt and Deleveraging, 2010) includes treasury debt, of course, but adds in household debt, non-financial corporate debt, and financial debt.
It’s somewhat understandable that a CEO of the arguably most powerful bank in the world would not voice this specific concern, since a bank’s business is debt. Kudos to him for this reasonable and relatively unfiltered warning.
Excellent point.
Systemic debt (which includes all sectors) has been soaring for decades – seemingly beyond the capacity to actually, you know, *repay* much of it, ever (otherwise, why would there only be the perpetual upward climb in debt…wouldn’t an economy that was actually making healthy use of said debt (ie, sustainably growing in real terms) at least occasionally be able to pay down some of that enormous pile of…debt… with the proceeds of actual growth?
And yet the debt pile only engorges, perpetually.
And, of course, the G pretends it can “fix” this unsustainable course by printing money (artificially lowering interest rates, temporarily), making the engorged debt pile temporarily serviceable (if irresolvable).
But all that accomplishes (since money printing creates no real assets) is to transmute debt into inflation…which the G attempts to frame private actors for (despite the fact that the G printed the money and encouraged the debt by artificially lowering rates in the first place).
The vilification of debt capital is getting a little old.
People need to understand that:
1. investors invest in two types of capital:
— equity capital (such as stocks)
— debt capital (such as bonds).
2. Companies raise two types of capital:
— equity capital (selling shares, such as to VC investors or during an IPO)
— debt capital, such as selling bonds or borrowing from a lender.
Governments generally don’t raise funds through equity capital (selling shares). They raise funds through debt capital (selling bonds).
Both types of capital are perfectly legitimate and serve their purpose. The risk profile changes when emphasis shifts from one to the other, for both investors (debt capital is lower risk for investors) and companies (debt capital increases the risk for companies because they HAVE to pay interest and HAVE to pay back the face value at maturity, and they don’t have to do anything such thing with equity capital).
But the problem that companies and governments run into is not debt per se, but too much of it. Companies can clear this up with restructuring of the debt including under the supervision of a bankruptcy judge, and they get liquidated to pay the creditors. National governments that borrow in their own currency deal with this through inflation.
Respectfully, and frankly, inflation does NOT deal with our government’s debt capital increases.
It certainly makes the debt easier to service, but does not reduce the pile, as mentioned by Cas127… not even one molecule.
That is why there is continued vilification. The debt is not being structurally reduced and government behavior is not addressing the problem in a strategic manner.
Letting inflation “run” is not a sustainable solution for a world economic power. It is a cop-out, IMHO.
No one cares about the absolute dollar-denominated “pile” of debt — that number is for entertainment only — because you’re paying for it with inflated dollars, that’s what matters. There are real issues, but you cannot even discuss the real issues if people keep throwing this goofball stuff around.
Wolf-
“But the problem that companies and governments run into is not debt per se, but too much of it.”
This was my point exactly. If you have identified interest on treasury securities as a percent of revenues as a key metric to watch (correctly in my opinion), how can the magnitude of the debt burden NOT be important?
Wolf,
The most concise way I could summarize your post would be to remind everyone that for every debtor out there, there is a creditor who invested money with the debtor.
There are two sides to debts. The debt Cassandras only see one side.
JimL-
A shift that occurred in the 1980’s for those who are NOT “debt Cassandras” to think about:
“Like the Europeans, the Americans have become reconciled to a permanent national debt. They have come to measure its burden not in terms of principal but in terms of interest, its inflationary effects, and the undesirable competition (crowding out) it provides to private borrowers.”
— Sydney Homer and Richard Sylla, A History of Interest Rates
This quote applies equally to other forms of non-governmental debt…
John H.
You probably do not realize it, but you demonstrated my point very concisely.
You can spin it, ignore it, or whatever, but it doesn’t change the absolute fact, that for every debt out there, there is/are creditor(s) making an investment.
Please indulge a novice.
“If long-end rates go up over 6% and this increase is accompanied by a recession…”
I wouldn’t be shocked if we saw 6% rates /followed/ by a recession, but the recession would drive rates down, yes?
Because of all the government debt, the government might not be able to cut rates in a recession without causing run away inflation.
This happened in the 1970s.
Because most investors have never experienced something like this in their lifetimes, they don’t think it can happen.
Huh. I thought I had my bases covered as far as doom & gloom prognostications go, and then all of a sudden there’s this.
Well, thanks for the heads-up.
The FED FUNDS BRACKET RACKET was introduced in 1965. This led to all the trading desks’ operations to be triggered by hitting the top of the bracket. This fueled the Great Inflation. The money supply can never be properly managed by any attempt to control the cost of credit.
Not necessarily. That’s the stagflationary outcome. Yield Curve Control is a tool to handle that, but not first or second choice of the Fed.
The Fed cannot use yield curve control if there is a lot of inflation because it’ll turn inflation into hyperinflation. Japan used it when it didn’t have any inflation, and it stopped when it got inflation. The Fed used it during/after WW2, but it stopped when CPI hit double-digits in 1948. When there is inflation, yield curve control throws a lot of fuel on the inflation fire. Everyone knows that, even the Fed.
Hyperinflation is not a monetary phenomena, it is a result of loss of supply and production. If you do not know that, you do not know shit…
Jdog,
🤣❤️ Venezuela. Didn’t have a supply problem, and didn’t have a production problem. The Chavez government made promises it could only keep by money printing, and it ended up with hyperinflation. Zimbabwe same thing. It’s repeated over and over again. Dozens of countries went that route.
You’re just hung up on the Weimar Republic, which was a unique case, not a normal case. And even there, it became monetary, even though it was triggered initially by supply and production problems.
Thank you for mentioning Venezuela. Marxists and Socialists won’t like this from Wikipedia
“According to experts, Venezuela’s economy began to experience hyperinflation during the first year of Nicolás Maduro’s presidency.
Potential causes of the hyperinflation include heavy money-printing and deficit spending”
” Inflation rates became the highest in the world by 2014 under Nicolás Maduro, and continued to increase in the following years, with inflation exceeding 1,000,000% by 2018.”
Famine, poverty, corruption, and collapse.
Are there more than 1000 people who consider themselves Marxists or Socialists?
In other words who exactly are you arguing against? They do not really exist.
A recession generally might prompt the Fed to lower rates in order to maintain the employment side of their mandate.
However, in this scenario I think its a lot less likely for this to happen – unemployment is still at historic lows and inflation is marching higher again.
As Bond Vigilante Wannabe alludes to above, the Fed could actually lose control of the long end of the curve if they force short rates too low. If bond investors doubt the Fed’s ability to bring inflation back down, long bonds will reprice lower (yields rise).
I think Dimon’s comments about 6% rates and a recession were regarding his takeover of SVB bank.
If right after the takeover, rates had continued to rise and then the economy tipped into recession there would have been some really bad events coming out of the banking sector.
Lots of banks would have suffered and it would have been a huge strain on the FDIC.
Additionally, the US is stepping back from its role of providing security that makes global trade even possible. My general understanding is that the Chinese economy, for example, is dependent upon the security we provide to keep internal shipping lanes open.
Doubtful but I’m sure China would be crushed if no US military in South China Sea.
I honestly cannot tell if that was sarcasm.
Complete. The South China see is fascinating given the sheer resources there (oil, natural gas, food, islands,etc.) and the competing claims between PRC, ROC, Vietnam, Malaysia, Brunei, and the Philippines. They all have claims based on various time periods of which is fascinating in itself. Some great videos on it if you Google a bit.
Dimon and all his Wall St. cronies priced in rate cuts and drove stocks to the moon with their speculative excesses. Now that rate cuts aren’t coming, they’re still price in. What’s the next phony narrative to drive everything even higher?
The narrative is that these higher rates are just a momentary blip, and will be followed by ZIRP again in no time.
Even if rates drop and settle around 4%, stocks will be wildly overpriced, as they’re priced for ZIRP.
Actually, banks don’t own stocks. They use their money to make loans to customers.
Now JPM does offer mutual funds, sponsor ETFs, and owns a discount brokerage. But all the stocks are owned by their customers, not them.
Did you even attempt to read the article? Clearly you failed to comprehend it if you did attempt to read it.
You have your views. Contrary evidence be damned.
Interesting letter. I am surprised he didn’t consider the potential impact of demographics, which I see at the biggest deflationary force going forward, if Japan, Germany and now China are anything to go by.
LOL. You’re not keep up, are you? Explosion of immigration in the US, Europe, Canada, etc. Nicely inflationary, including rent inflation.
https://wolfstreet.com/2024/04/03/how-the-huge-wave-of-immigrants-into-the-us-in-2022-and-2023-impacts-the-employment-data-of-the-bls-household-survey/
And in Canada:
https://wolfstreet.com/2024/03/27/amid-canadas-huge-immigration-surge-population-growth-hits-3-2-triggers-10-rent-inflation-even-as-home-prices-drop/
And rents:
Immigrants not going through the legal immigration process are actually illegal foreign nationals. They are breaking the US INS laws. We have no idea what type of individuals or their backgrounds who are crossing our borders.
Demo graphic cliff can be easily handled with large scale immigration.
Sure, I am well aware that anglo countries in particular have seen a huge wave of immigration post-Covid. And I’m well aware of the huge backlash that has created in Canada which has resulted in a sequence of policy changes to reduce the wave of immigration.
But, despite this wave of immigration, the population pyramids continue their relentless trend towards top-heaviness, birth rates continue falling, and this continues to have, I think, a deflationary impact and will continue to do so going forward.
Of course this could be outweighed by other inflationary forces, but given that Dimon was surveying potential drivers of inflation and deflation going forward, ignoring the demographics factor seemed like a big oversight.
About this::
“”. And I’m well aware of the huge backlash that has created in Canada which has resulted in a sequence of policy changes to reduce the wave of immigration.””
I don’t think there was absolutely any backlash.
The democracy gives people illusion that common people have power but if you dig deeper you’d realize it’s just an illusion.
If people have power to backlash, they’d be on the streets about how affordable the basic necessities of life are.
Same for USA.
Until all the other countries run out of people, too. Mexico is already below 2 children per woman, and soon that will be the case everywhere.
Just came from a month long visit from biggest democracy on earth.
The wealth disparity and corruption is eye widening and to a next level there.
For upper middle class and rich people, hoarding multiple multiple homes to rent or to sell at higher prices is a religion.
I don’t blame them but again home ownership is a pipe dream to majority of the people.
Looks like USA/Canada is going the same path.
But if you don’t like the policies in USA/Canada, just visit any of these countries, you’d come back loving USA/CA.
Africa is ready and able to make up for the birth crash everywhere else. They are young and fertile. Africa and South Asia will continue to see massive population growth over the next few decades.
Inflation continues to “rear its ugly head”.
In the real world inflation is at least 5% and my take is 7+.
Interest rates should be between 8 & 10 per cent. The prime is at 8-1/2.
So at least that’s real.
B
Coming soon another CPI report.
Enjoy Wolf’s analysis but the financial mainstream media build these things up then moves on and spins them less than 60 seconds after their release.
“Huge fiscal spending, the trillions needed each year for the green economy, the remilitarization of the world and the restructuring of global trade — all are inflationary. I’m not sure models could pick this up.”
What model would include a “green economy” that can’t deliver energy on an industrial scale?
Cheap money got us here and more cheap money will not solve our problems.
The dollar is not the only game in town. Number one for now and losing ground all the time.
The real game is the value of the dollar.
The Fed has to print the money to pay interest on reserves (that were also printed) so QT has to continue and the reality is that QT should have been done before interest rate rises if they hadn’t painted themselves into a corner.
The Fed lost 114 billion in 2023. A small amount for the economy perhaps, but this is money going straight to the financial sector. The average working punter would have a heart attack if they knew and this is only the beginning of locked in losses.
“… but this is money going straight to the financial sector.”
Depends on how you define “financial sector.” Money market funds are held also by savers/investors, and THEY got the interest that the Fed is paying on ON RRPs. And bank savers got the interest on reserves that the Fed is paying to the banks.
The Fed’s two administered rates on reserves (5.4%) and ON RRPs (5.35%) are one of the reasons why US savers make 5%-plus on their cash. So the “financial sector” is paying this money to retail investors/savers – forced by competition for deposits.
Here’s a dependable “prognostication”:
Weather forecast for tonight: dark.
–George Carlin
Carlin was great. Had beer with him for a couple of hours in college.
The drastic increase in interest rates in the United States is sucking vast quantities of liquidity out of the world economic system. As Warren Buffett famously said, “A rising tide floats all boats…. Only when the tide goes out do you discover who’s been swimming naked.” After a decade and a half of easy money, gigantic segments of the economy are bound to have been “swimming naked.” When the buck stops, the results are bound to be catastrophic. Since the U.S. is at the top of the capitalist food chain and essentially controls international credit conditions, even if it turns out to be the epicenter of the crisis it will be able to use its dominant position to make the rest of the world pay for the consequences. This will be particularly devastating for countries of the developing world, many of which are already in deep crisis, such as Sri Lanka, Pakistan and Lebanon. But the consequences will be global and will necessarily lead to further blows to the world order, including from powers the U.S. today considers allies.
A significant part of the economic establishment is either lying or willfully blind to the prospects of the world economy. Certain parts of the social-democratic left have argued that high government debt levels are of no great concern and that working people would benefit more from low interest rates and more debt than from the current policy of higher interest rates. This is an echo of those in the bourgeoisie who wish to kick the can one more time, hopefully past the next election. The truth is that all policy alternatives—whether high debt, high inflation or deflation—will be used to attack the living standards of the working class. The fundamental underlying problem is the huge imbalance between the capital that exists on paper and the actual productive capacities of the world economy. No financial wizardry can solve this problem. The only way out is for the working class to take control of the political and economic reins and reorganize the economy in a rational way.
For right-wing economists, the solution is to let the free market do its work: accept that there will be a devastating crisis, let the weak die and the strong emerge stronger. But the times of free-market capitalism are long gone. The world economy is dominated by a small number of gigantic monopolies competing with the monopolies of other countries. No state is ready to let its monopolies collapse. If Ford and GM go bankrupt, this would not revive American free enterprise but strengthen Toyota and Volkswagen. Unbridled capitalism leads not to free markets but to monopolies. On the one hand, this reflects the tendency toward centralized planned production on a global scale. But on the other, under imperialism monopolies obstruct the growth of productive forces, leading to decay and parasitism.
For social democrats such as economist Michael Hudson, the panacea is a “mixed economy”—capitalism with state intervention and regulation. Whereas this was considered heresy in economic and government circles in recent decades, planning is becoming fashionable again. This is not out of enlightenment but because national capitalism needs propping up to stave off bankruptcy and compete with China. While the working class can wrest concessions from the capitalists through class struggle, it is not possible to regulate away the contradictions of imperialism. The irrationality and parasitism of the system are rooted in the very dynamics of capitalist accumulation. The government is itself no counterweight to the tiny clique of capitalist financiers but serves as their executive committee. When it interferes in economic matters, it is ultimately to benefit the imperialist ruling class.
re: “Unbridled capitalism leads not to free markets but to monopolies.”
Yup. The “administered” prices (oligopoly, monopsony, and monopoly elements) would not be the “asked” prices, were they not “validated” by M*Vt, money X’s velocity, i.e., “validated” by the world’s Central Banks.
The entire world is drowning in vast excess liquidity.
I’m in the lending business, and I’m getting interest rate quotes weekly from large debt funds. Even some of the higher risk debt funds are pricing loans BELOW prime. This all has to do with rate expectations, and the investors that are buying these loans have had expectations that rates are going down obviously, thus the pricing quotes below prime.
Since they aren’t listening to the Fed’s rumblings as of late, I wonder if this newsflash from Jamie Dimond might push their interest rates higher? Interesting times. Thanks for sharing Wolf.
Higher rates will be the death of the real estate market. Rental property is going to be great, as ownership continues to grow more unaffordable.
In short, wages will have to rise a lot, and asset prices fall to equalize. Inflation will continue to run, especially as the Russian fire sale of commodity stockpiles ends.
Mitigation factors include rising immigration upping demand. But these trends have been running a long time, so the changes are needed are going to be large. Like everything the boomers touched was super sized, these changes are the last part of the story.
Totally unrelated but how did DJT get listed on NASDAQ? I thought there might be revenue requirements but seems like 4 million in revenue doesn’t hit a very high bar. I get companies being listed that have large operating losses of course as that is the supposed intention of going public. With that revenue as a bar one would think there would be tens of thousands of companies versus the slightly less than 3,600. Makes perfect sense DoorDash is listed for example despite not being profitable nor necessarily having a model that can get there.
Howdy Glen. Because apps are popular? Youngins seem to think anything can be done by app ing.
There is no “revenue requirement” to list on the Nasdaq, but there is a minimum stock price requirement to stay listed on the Nasdaq. There are many companies with $0 revenues, including biotech startups trying to develop medications but without any products, that trade on the Nasdaq.
In terms of DJT: It was a SPAC (Digital World Acquisition Corp.) that got listed under the ticker [DWAC] some years ago. SPACs by definition are shell companies with zero revenues. And then — usually within two years — they have to find a target company that they acquire, which then becomes the publicly traded company. All SPACs operate that way, and we have pooh-poohed SPACs here for years, and most of them have joined my pantheon of Imploded Stocks.
DWAC then acquired Trump Media & Technology Group. In March 2024, shareholders of DWAC approved the deal, and the deal closed, the ticker was changed from DWAC to DJT.
Thanks. Will be interesting to watch.
Question: why is gold goin up?
It is the only easy and private alternative to the dollar.
Physical gold and silver are easy to buy and sell.
The wild card is when the West looses control of price fixing.
Most of the people who hate us, love gold and other hard assets.
Unfortunately it is not at all easy to buy and sell physical gold. Also selling gold is a taxable event.
Texas I think is on the way to creating a State Chartered Gold Bank. Thats a small step in the right direction.
Interestingly a outfit in Wyoming named “Custody Bank” was trying to get chartered with the FED to start a bank that only took deposits and did no lending. Thus no fractional reserve banking, thus not part of the credit creation/destruction machine – simply a place to park money effectively out of the banking system and its remote but real legal ambiguity about the nature of deposits (today, deposits are in the worst case, unsecured loans to the bank)
Of course the FED is not going to allow them to become a bank so perhaps that tells you something ?
That fake wannabe bank (“narrow bank”) in Wyoming is trying to be essentially a hedge fund, borrowing from depositors, backed by FDIC deposit insurance, and investing the funds, including at the Fed for 5.4%, with the owners taking the spread. No company with that business plan should ever become a federally backed bank. There are money market funds that do the same thing, but without federal backing, and that’s how it should be.
actually gold is pretty easy to buy and sell and is not reported by the dealer ( on sales ) to the feds unless sales are greater than $10k each sale ( where I live ); obviously if a dealer were audited the records would be there and could be tracked but, a reputable local dealer shouldn’t have much in the way of an audit problem and the individual selling relatively small amounts d/n have a great deal of risk so it being a “taxable event ” should be a non issue. Theoretically, selling your baseball card collection could be considered a taxable event but unless you are selling your Bonus Wagner card at auction I don’t believe I’d be putting it on my 1040.
Gold has no value or utility at all in relationship to commerce and is completely impractical and impossible to use as an sort of viable medium of exchange, not to mention the fact that there is less than 1/10 ounce even is existence for the world’s population.
Why is anything going up?
Maybe tomorrow you have to ask, “Why is gold going down?”
Gold is going up because money flows are going up. This will reverse.
Plenty of reasons…..Some folks have floated the idea that Chinese citizens are being told by their government to buy gold and since their real estate market and stock markets are not attractive right now in China and they cannot invest internationally……its gold…..which they have historically trusted. 1.4 billion folks.
Another reason being floated……the central banks of emerging countries have had it with the sanctioning of their reserves by the US and allies if they do not adhere to US policy. What other fiat can be a secure reserve….none……so gold.
Another…..the Brics are looking to build a replacement transaction system over the next 5 to 10 years and gold might play a role.
The Chinese central bank wants to disconnect from the dollar prior to engaging in any Taiwan confrontation. The Russians have already gone this route and have no reason to dabble in anything but gold.
Another….the US debt has finally arrived at the point at which foreign holders of dollars are marginally gun shy…..gold.
Another…. US fed fails to confront inflation in a Volcker fashion…..inflation continues to fester with a congress preparing to spend more
Another…..The US and allies are just about to throw in the towel in
Ukraine…..the Russians win…..signaling the end of US dominance.
The BRICS and potential new members may become dominant soon.
What the heck…..one more for the road……the Chinese have built a huge stockpile of gold which exceeds US resources and continue to do so….at a faster pace. Some say they may officially hold as much as 35000 tons. 4x the US.
The rough numbers….
Last estimate I saw……COMEX held 2200 tons about a year and half ago….they are down to 1400 tons or lower now. In the past year China officially imported approximately 1250 tons…..since they produce about 400 tons which they do not allow exports of the total is 1650 tons…..the entire world produced somewhere around 2700 tons……and Russia produced 350 tons and did import more…… leaving 700 tons or less for the world outside China and Russia……India and its 1.4 billion citizens love gold…..the central banks want more……so…..supply is short….demand is large…..and inventories are shrinking…..and new mines take decades to start.
It’s only going one way…..most folks in the US have sold in order to participate in the fed bubble market…..when they turn…….Oh brother.
The larger US banks have started steering their largest clients into gold.
It has nothing to do with hate…..it has to do with economics…..and if the economics are against you….don’t shoot the messenger.
LOL. if someone buys gold, someone else HAS TO SELL GOLD to them. Why are the gold bugs never talking about all the people that SELL GOLD to those that are buying gold. The contortions of gold memes are hilarious.
Well……just to tag you back before bed……they sell for the same reasons someone sold Nvidia stock at $100 per share to someone else. They are not in the know. The US government and others have gone out of their way to ridicule gold as money in spite of 1000’s of years of history as money while they continue to hand you paper backed by their word that they will not inflate….when as you know they continue to inflate consistently and excessively. You can do 2 things with these worthless dollars, invest in profitable securities and real estate of convert it to real money……..Gold. Gold cannot be inflated……what is mined is mined……..and most important….nobody can simply take it without remuneration…..which has been happening more and more recently……and in the case of electronic currency…..jezz
However I agree……if I had my choice between 100 shares of Microsoft or 100 ounces of gold….I’d take 80 shares of MSFT and 20 ounces of gold.
Let’s just hope that our US dollar lives on and on and on.
> They are not in the know.
If the people recently selling gold weren’t in the know, then they wouldn’t have been demanding record prices for it before selling and the price wouldn’t be going up!
BTW it’s worth noting that gold isn’t yet at an all time high if you adjust it’s price for inflation. I.e. deflation of the value of the world’s currencies has inflated the price of gold too, so really it’s not that high at the moment.
Your argument can be applied to any financial instrument. The rest of the world is buying lots of gold lately. I wonder why….
Otto Maddox,
So who is SELLING them the gold??? why do you people keep ignoring the fact that the sellers are DUMPING this gold. What do they know that the buyers don’t? I wonder why they’re selling….
Inane manic speculation, and for no other valid reason at all.
One argument is flight to safety due to loss of confidence in dollar/other assets.
Another is that gold prices are in a speculative bubble just like other assets, and will correct down.
Pick your trade wisely.
No worries, tomorrow gold will get monkey-hammered, as usual.
Physical sells at paper-thin premiums to spot tells me there is no demand.
I’ll take a stab at your question. The US has been using the US dollar to sanction countries for a decade. Think Russia, Iran and North Korea. Now other BRIC countries including India and China want fewer US dollars and investments. The EU is also sanctioning these countries so that currency is not wanted. The only reserve asset left is gold. The BRICs have been increasing their official gold holdings for years, central banks accumulated over 1,000 tons in 2022 and 2023. Now physical gold inventories in the UK and Switzerland are at alarmingly low levels. See the recent story about Canada shipping $1 Billion in unwrought (unrefined) gold to Europe in February 2024. I don’t know if they can keep the paper gold market (which is estimated to be 200 to 250 times greater than the physical supply of gold) from collapsing, similar to a run on a bank, but it must be very interesting behind the scenes.
MW: Money-market fund assets rise to record, as ‘investors love cash’ even as stocks climb in 2024
MW: Nvidia’s stock has entered correction territory. Apple was already there.
Tesla too: https://wolfstreet.com/2024/02/24/nvidia-the-wtf-chart-of-the-year-tesla-also-had-wtf-charts-of-the-year-before-shares-plunged/
Has anyone analyzed the relationship between Wolf’s WTF pronouncements and these stocks peaking? Asking for a friend.
The WTF points are usually early. It’s just astounding how far these momentum trades can go. With TSLA I had to do three WTF points, ending with my infamous Triple-WTF Chart of the Year 🤣 . With NVDA, I was more patient, but obviously it too was early.
Another interesting article and feedback from WR’s ecosystem. Just wanted to pass along some observations based on the content provided in the various posts.
– I suspect inflation is going to be a much more difficult beast to tackle than people realize. WR has been harping on this issue for quite some time and if you refer back in the history books, it took Volcker years to get inflation under control, involving I believe two recessions, and interest rates that reached in the 18% + range. Once inflation becomes entrenched, it can be a real “beeatch” to tame.
– WR is right that inflation is used by governments to inflate away excess debt levels. Of course, an alternative path could be used to simply default on the debt but let’s face it, this path (by a country like the US) would most likely be disastrous. Remember, with inflation, the worst outcome (for those in charge) would be to lose their jobs. In the event of defaults and potential rapid deflation, these parties would probably not only lose their jobs but their lives as well.
– The simplest definition of inflation boils down to the laws of supply and demand, that is, too much money chasing too few goods and services. Hyperinflation is best defined as a lose of faith in a currency leading to wild and uncontrolled price appreciation as the faith of a currency is destroyed, and relatively quickly. Various smaller countries around the world have had to deal with this over the past decade as the population losses faith in their local currency.
– As for the price of gold’s (and silver’s) recent price increases (e.g., gold up 17% since mid February 2024), its hard to say with any degree of accuracy why the sudden and sharp move higher. I suspect its a combination of factors including the usual suspect of “hot” or speculative money jumping in on the latest meme trade which will eventually flatten out, resulting in a correction. However, one cannot dismiss other factors at play including large buying by world Central Banks and other parties establishing hedges against world unrest/inflation. I would concur with WR’s comment that in 30 days, everyone could be asking why is the price going down, well this is the market as the one thing I’ve learned about investing in precious metals over the years (which I’ve been in for over 20 years), is if you can’t stand volatility, precious metals are not for you.
– Finally, as the old saying goes, “opinions are like A….les, everyone’s got one” and so does Jamie Diamond. Of course his opinion may carry more weight given his standing in the business/financial community but I can’t help but think that every time one of these billionaires speaks, they have an alternative motive in which they’re attempting to “persuade” (for lack of a better term) the markets for their financial gain. So to expand on the old saying, “with the only difference being, who’s opinion stinks the worst”.
“I suspect inflation is going to be a much more difficult beast to tackle than people realize.”
Agree 100%. The inflation toothpaste cannot be put back in the tube, contrary to popular belief.
I think the only way inflation can be “handled” long term is recession. A central bank can hold inflation down, repress it, mute it, etc., but the moment they let up, inflation will roar back.
Right now the FED is faced with a difficult choice. They want to keep inflation restrained. In order to do that they might have to raise rates. However they also see much of the rest of the world falling into a recession. They are afraid of that hitting the U.S. They don’t want to be the cause of inflation on the U.S.
Unfortunately I think they have walked that tightrope as far as they can. Inflation has been bubbling under the surface far too much. They will need to make a choice soon.
Gold waxes and wanes with faith in Central Banks.
Had troubles with TD direct that I thought I would warn people. I setup my account 3 years ago as a trust account and have been buying and selling. I accidentally locked myself and when I called they said my trust account needed additional authorizations, including notarized forms and such. Basically anything that matures until resolved goes into their zero interest account. The expected turnaround time is 26 weeks.
I asked why they didn’t notify me or why they allowed all of this to occur with invalid account. Crickets!
I also asked in the interim could they just reset or convert or do anything and a big nope.
Long story short: make sure if you had a trust account it is all good otherwise they get your money for free if a hold occurs for any reason.
Another FYI about TreasuryDirect: don’t forget your password. Last time I called to reset it I was on hold for ~3 hours before finally talking to someone.
Thank you for this info, Glen! May let US-T’s run off at maturity in TD and put in a brokerage account and invest in US-T’s there instead. 26 week hold ridiculous. Also, as a warning, I believe through anecdotal evidence of troubles that my brother and I had from 2022 taxes (Mine a considerable refund that took 8 months to receive and his fixing an IRS screwup) that those who file with paper returns are at a greater risk of problems. As per the Tax Advocate (verbal to my brother). TA told me IRS is greatly understaffed. Quality of personnel dealing with extremely complicated tax code is questionable, to put it nicely.
TLT should be $85
Only 7.6% more to go.
👍🏻 It will get there.
ZH making a big deal about Goldman Sucks cutting rates on their savings accounts (something I commented on a couple of days ago). ZH propaganda saying it’s a sign that GS knows the Fed is going to start cutting soon. GS analysts are idiots, so I know it’s ZH wishful thinking. I’m so sick of this s h I t.
🤣🤣🤣
ZH for entertainment.
Definitely entertaining and pathetic. Lol
Why does anyone read ZH? There are better sources of entertainment and most definitely better sources of information.
20 years of quantitative easing needs to be reversed with 20 years of quantitative tightening.
CPI report out. … yeah I don’t see any rate cuts this year. I don’t mean to laugh, but as I sit here and watch my poor stocks bleed out, I cant help but have a really good laugh.
rate cuts. lmao.