Just 42 days until the next Fed decision!!
So how negative are real rates now?
"You know, if baseball umpires were on the front page of the sports section every week, you'd know something was desperately wrong with the game."
- Jim Grant, on Central Bankers
75 basis points. Another 800 bips or so and they’d be at “the neutral rate.”
Clearly “price stability” mean a constant climb.
Private-Equity Man Jerome Powell, September 22, 2021
I guess the inflation rates for next year and 2023 were also marked up, but just by a couple of tenths. Why—those are very modest overshoots. You’re looking at 2.2% and 2.1%, you know, two years and three years out. These are very, very—I don’t think that households are going to, you know, notice a couple of tenths of an overshoot.
Classic CNBS: Sure, bring on a guy who was chairman of the Fed Board of Governors 'Committee on Supervision & Regulation of Banking Institutions' from March 1, 2006 until January 21, 2009. This guy opining on Fed credibility. I can’t make this stuff.
CNBS had NAR Chief Economist Lawrence Yun on today, which reminded me of former NAR Chief Economist David Lereah:
According to the latest Fed figures, as of the end Q1 2022, households and nonprofits hold $40 trillion in real estate funded in part by $12 trillion in home mortgages. Households also hold $46 trillion in stocks and $8.6 trillion in bonds. In other words, since the last crisis, bond exposure is up by half, housing equity has more than doubled, stock market exposure has nearly tripled, and much of that change occurred in the past two years.
A reminder of who owns ”Corporate equities and mutual fund shares”:
Dan Oliver continues: “It is worth noting that the U.S as a whole has added $35 trillion in debt since 2011, the previous time the 10- year Treasury yield was above 3.3%.”
The word stagflation brings the 1970s to mind, as it should. But conditions are very different this time. The 1970s saw Federal debt increase from $370 billion to $850 billion. But inflation during that time reduced federal debt as a percentage of GDP from 35% to 31%. Total debt for all sectors ended the decade at 160% of GDP.
The federal debt to GDP ratio now stands at 125% and total debt at 370%. A onetime dollar devaluation of 75% would return debt to 1980s levels ceteris paribus—but, of course, all things are never equal. The devaluation will be expressed in terms of the general price level as influenced by commodity prices. And the quadrupling of prices that a devaluation of that magnitude implies would shock GDP lower, which would then boost the debt ratios again and require even more dollar weakness to bring debt levels back to sustainable levels.
Remember as well that GDP is an absurd statistic: GDP measures economic activity, not wealth. When the Chinese build a high-speed rail to nowhere or a ghost city, the expenditure adds to GDP but consumes wealth. How much of U.S. GDP is wealth enhancing versus wealth-destroying?
…Looking forward, then: the late Autumn promises rising unemployment, plunging asset prices, soaring deficits, a temporarily softening official CPI number (even while the costs of living continue to increase), and more war—and, if the adjustment is quick enough, all in the context of a looming mid-term election.
It will be like the Autumn of 2008: everyone, from the Left to Right, from Elizabeth Warren to the Wall Street Journal, will be clamoring for Fed intervention. Is the Fed really so independent as to crucify the market and the economy and the government on the cross of a strong dollar?
Deflationary shocks are the handmaidens of hyperinflation. As in 1970 in the U.S. and 1922 in Weimar, the pain will be too much: the Fed will print again and faster. Listen carefully and you will hear Senator Schumer beginning to growl: “Get to work, Mr. Chairman.” As it did in 2009 and 2020, gold will get the message first.
I can’t wait for the Fed’s terminal rate.
More fun on Reddit…Godspeed.
Still getting used to new venue but great work as always
That 75bps cheered everyone up for some reason for a day. Back to work grinding money to dust today. More to follow. No chance they raise enough to control inflation. None. Though housing and rent deflation could be a sight to behold.