The Fed's enormous, unforgivable miss on inflation
Inflation is politically unpopular.
"I grew up in France, so I had a good dose of Marx in my education. The first thing Marx teaches you is that revolutions are typically the result of inflation."
“Gold stocks are one of the best performing groups this year. The GDX share count has fallen by almost 15% - particularly in the last two months, as they’ve taken off….not only are people not investing in gold equities, and liquidating, at least via the ETF’s, but they’re actively betting against them.”
- comment from a very glitchy Twitter Spaces recording I came across, hosted by Mike Green
Ok then - so World War III is breaking above resistance in the Mideast (if not Eastern Europe,) and oil is at $70, the VIX is 18.9, and the $SPX is 1% off all-time (nominal) highs. Par for the course.
Meanwhile, FRED tells me my cost of living has only gone up 2.6% over the past year, a number I find frankly ridiculous, and insulting. It seems I am not alone in that view.
I am still very long, but I have raised some cash recently - heresy I know - to pay bills (even with that tiny 2.6% CPI!), and to have some of the proverbial “dry powder” (aka ‘cash on the sidelines’). I sold part of a big winner, and an annoying loser (yes, sometimes you can lose money in the stock market, kids.) They offset, so I can avoid paying capital gains taxes (although the capital gains tax rate is probably as low as it’ll ever be.)
I am not ashamed to say I did not watch the debate. I will listen to one of Ron Paul’s podcasts as penance.
Godspeed.
Something to perhaps be aware of:
“The storm unleashed the worst flooding in a century in North Carolina. One community, Spruce Pine, was doused with over 2 feet (61 centimeters) of rain from Tuesday through Saturday.”
North Carolina's Spruce Pine, devastated by Hurricane Helene, is the world's main source of high-purity quartz needed for semiconductors, the production of which could be disrupted “The mining district of the area is where high purity quartz (HPQ) used in the production of silicon wafers for semiconductors and solar panel cells is extracted; it is one of, if not the, most important source of the critical mineral…Belgian global mining giant Sibelco's Spruce Pine has pretty much a total worldwide monopoly on HPQ:”
“Here’s something scary,” says one veteran of the sector. “If you flew over the two mines in Spruce Pine with a crop duster loaded with a very particular powder, you could end the world’s production of semiconductors and solar panels within six months.” No high-purity quartz means no Czochralski crucibles, which means no monocrystalline silicon wafers, which means, well, the end of computer chip manufacture as we know it. We would adapt; find a new process or an alternative substance. But it would be a grisly few years. Perhaps this is why those who work in high-purity quartz are so jumpy. Perhaps that’s why the man who passed on that scary thought exercise insisted that I didn’t print the type of powder that would play such havoc with the processing of those mines in North Carolina, which quietly serve this tiny but pivotal role in the functioning of the modern world.
Ed Conway, Material World
From Grant’s Interest Rate Observer, September 13, 2024
“If there’s anything at all to the fiscal theory of inflation—it’s government overspending that ultimately causes the debasement of the currency, economist John Cochrane contends— we’ll know it soon enough. Meanwhile, America is reshoring and rearming and AI-ing. Taking one thing with another, the supply of raw materials is likely to prove less accommodative than Fed Chairman Jerome Powell…
“The United States has mined no antimony since the closure of the Sunshine Mine in Idaho in 2001,” according to the Center for Strategic & International Studies. “Today, the United States meets 18% of demand through the recycling of lead-acid batteries, but is otherwise import-reliant on China (63%), Belgium (8%), India (6%) and Bolivia (4%). The United States stockpiles limited antimony of just 1,100 tons compared to the 23,000 tons consumed in 2023.
China similarly dominates world production of gallium and germanium, essential minerals in semiconductor and military applications. Since those items came under export control last year, their prices have almost doubled…
Data centers could boost the demand for natural gas by between 7 billion and 16 billion cubic feet a day by 2030, according to Wells Fargo analysts led by Michael Blum, on top of the 35 Bcf/d used currently in the power sector. It’s incremental demand that coincides with the arrival of new or expanded liquefied-natural-gas export terminals. According to the U.S. Energy Information Administration, terminals with the combined capacity of 6 Bcf/d are coming online in the next 18 months.”
Harley Bassman explains Convexity
”Convexity means ‘unbalanced return.’ If I can make a dollar, or lose a dollar, that's zero convexity. If I make $2 and lose $1, positive convexity. If I lose three and make two, negative convexity. Stop. That's it, that's convexity. Don't think any harder. If you took ninth grade statistics, you could do my job, okay? The problem with negative convexity - big concept, you buy an option, limited loss, unlimited gain. That's why an equity is synthetically a call option on a company. When you're short the option, you have limited gain, unlimited loss. Unlimited loss. Think about that.
That's why it's always negative convexity that blows up. If you go look at the market crashes in the past, it's all by people being short convexity in some manner, fashion, or form. The GFC was really a giant short put trade on mortgage credit. You could model the trade up as a shorter put option, and that's why Merrill Lynch managed to lose $50 billion in short order, which they didn't think it was even possible.”
Stanley "O'Neal was fired in November 2007 after Merrill Lynch lost $8 billion on mortgage-backed securities, and was given a golden parachute of $161.5 million."
“Thain himself was eventually fired after it became public that he spent more than $1 million renovating his Merrill office — including $87,700 for a pair of guest chairs — as the company was on the verge of bankruptcy.”
“Neither the jobs numbers nor inflation data justified a 50 basis point cut in interest rates. The Federal Reserve cut rates by an amount exclusively seen in periods of serious economic stress for two reasons: first, the upcoming presidential election, and second, the exponentially growing federal deficit. But since these are the types of things they don’t want to admit out loud, they prattled on about jobs and inflation to pretend that their action was principled. And naturally the bought-and-paid-for-by-Wall-Street financial media was happy to go along for the ride (Jay Powell just feeds stories to Nick Timiraos at The Wall Street Journal).”
James Aitken
“In August, 2023, the Fed started saying monetary policy was restrictive. Whether it was sufficiently restrictive or not, time would tell, but the argument was that they felt that monetary policy was restrictive. That narrative started in August, 2023. There was a bit of a false start with their eagerness to cut, as we all recall. As we turned into 2024, they thought they would have a window to start cutting sometime around March. Didn't pan out that way, but here we are.
But the point Demetri is that since the Fed deemed monetary policy to be sufficiently restrictive, the S&P is up over 30%, gold's up over 30%, real GDP has come in at about three and a bit, 3.4%, which is about one and a bit percent above what the Fed still thinks per their updated statement of economic projections. It's still over one percentage point above what the Fed thinks is long run sustainable trend growth in the US economy. You can see the obvious dichotomy there. If monetary policy was truly restrictive, I would doubt that the economy is still growing above trend, let alone at certain asset prices would be up 30 plus percent and some, as you and I know, and every listener's know up a heck of a lot more than that. So it's a bit of a strange old world where we're told over and over again, monetary policy is restrictive and yet what we observe in the real world would suggest perhaps that it's probably not.”
Re: Jay's Jackson Hole speech this past August
Aitken: “He did a very, very brief, frankly lightweight mea culpa of how the Fed misjudged inflation, which he ended with that quip, "Your mileage may vary." In other words, people may disagree with this. But Demetri, this is all in the public record. He said, oh, and I'm paraphrasing only a little bit, he said, "Oh, we knew at the board or the FOMC by the summer of 2021 that inflation was not going to be transitory. We announced that our views were changing in October. We pivoted in November, 2021, and then we started hiking rates in March, 2022."
It's like, hold on a second, what? You knew the odds were rising, it was nontransitory in the summer of 2021. You telegraph that in October, 2021 via various communications. You pivoted in November, 2021, and yet you kept doing QE until March, 2022. That's just insane. And I still don't know why they kept doing QE even though they knew that inflation was getting away from them. I still don't know why they had to wait all the way until March, 2022.
And let's not forget they only started with a 25 basis point hike, and then they went to 75…So what am I telling you? I wonder if the cool lie of history will judge the Fed's enormous unforgivable miss on inflation through late '21 and '22”
“There's been this consistent talk that, "Oh, well, it's easy. This is what you do. Look at what we did after World War Two. We inflated the debt away." Well, hang on a second. We inflated the debt away with very, very different monetary policy regimes, with needless to say, a very different global exchange rate regime. And with less cross-border capital flows.
It's very hard to inflate your debt away if everyone's trying to do the same thing, isn't it? I mean, there's no escaping it. If everyone's trying to inflate their way out of debt, well - nobody really wins, at least not in the world of floating exchange rates.
What has obviously emerged through 2021, 2022 and 2023 and even to this day is how politically unpopular inflation is. People are really pissed off, and all the politicians and others saying, "Oh, isn't it great? Inflation's come down." Yeah, but my cost of living is still up 30% to 35% over the past four years and I'm angry. So it's interesting that all these academic economists and others say, "Oh, the solution is to inflate it all away." Well, it's very tricky to do if everyone's doing it, if we have floating exchange rates which can adjust very quickly. And most of all, your taxpaying citizens who at the end of the day are there to finance your stock of debt, or at least help support your stock of debt, are dead against inflation and hate it.”
“If you set the wrong price of money over a sustained period of time, for whatever reason, the cumulative impact of that is devastating. And to keep everything on an even keel requires more and more and more intervention and meddling, which is not good. It's just not good.”
“Gold is a play on debasement. That's all it really is to us, a play on monetary debasement and fiscal largesse and fiscal stupidity. We don't see that ending.”
Via Grant’s:
“No 5%? No problem. Investors poured a net $121 billion into money market funds over the seven days through Wednesday, data from the Investment Company Institute show, pushing total assets to a record $6.42 trillion.”
“Given Pusillanimous Powell’s Premature Pivot, however, I fear that this Equilibrating Mechanism has been disrupted and that the Fed’s Best Friend has the potential to transform into the Fed’s Worst Enemy, depending on how Rest of World (RoW) responds:
Scenario A: a Weaker USD (which results from the Fed Out-DOVING RoW) re-imports Inflation from RoW. Just like a Strong USD yielded a more “Zero Sum” outcome by exporting US Inflation to RoW, a Weak USD does the same in reverse.
Scenario B: RoW’s CBs don’t allow the Fed to Out-Dove them, because it doesn’t behoove them to have Strong FX; in this scenario, they stymie a Weaker USD by aggressively cutting themselves, igniting a Competitive Cutting Cycle which gooses Global Inflation for everyone. Think of this as “growing the overall Inflation pie” vs. the “Zero Sum” Equilibrating outcome.
Unfortunately, I think Scenario B is not only more likely but also MUCH MORE INFLATIONARY.”
Joseph Wang, former NY Fed senior trader
“So what if a central bank does a bad job? If they are independent, then there's less probability of having to replace people who are not suited for that job. What comes to mind is Mary Daly of the San Francisco Fed, right? So she was fully on team transitory, so she got that call wrong, and then she's also supervisor for Silicon Valley Bank. Now they had access to all the books of Silicon Valley Bank, and did a terrible job supervising them, and ended up watching Silicon Valley Bank blow up. Now, she's still there, right? There's no accountability, and that's true for basically everyone in the Fed. If you say that they are just independent, well, there has to be some mechanism for broader accountability.”
“If homeownership is best understood as an investment, like equities, we should root for prices to go up. If housing is an essential good, like food and clothing, we should cheer when prices stay flat—or even when they fall.”
Empty Rentals Burn Vacation-Home Owners Near Florida’s Disney World “Kissimmee, the 21-square-mile Orlando suburb that calls itself the Vacation Home Capital of the World…has over 30,000 Airbnbs and other short-term rentals…Now some of those real estate bets are going bad.”
Good. Sell to normal homeowners or convert to long-term rentals.
CMBS Delinquency Rates by Property Type
I think I did this right. It looks like - especially since 2008 - there's been a huge spike in people leaving the workforce.
Close to 50% of America's potential labor force is now not in the labor force?
Multifamily Permits Drop 16.8% YoY Despite Record Deliveries
Multifamily construction permits fell by 16.8% YoY across all U.S. Census regions in August, according to RealPage Analytics’ analysis of new census data. Despite an 8.3% bump in multifamily permits compared to July, the annual data shows a sharp decline…Interestingly, while overall multifamily permits fell, multifamily completions surged. Over the past 12 months, 740K units were completed—the highest number recorded in 50 years, and up 36.5% in August from July’s adjusted total (and nearly 80% above August 2023’s completions).
State Farm Expects to Shed 1M Homeowner Policies in California “State Farm, California’s largest home insurer, expects to cut 1 million policies to stay financially solvent. The Illinois-based firm, whose trademarked jingle is “Like a good neighbor, State Farm is there,” expects it won’t be here for a third of its statewide property insurance policyholders by the end of 2028”
The CRE Finance Council (CREFC) said its Third-Quarter 2024 (3Q 2024) Board of Governors (BOG) Sentiment Index survey rose to 121.1, up approximately 18% from the second quarter for the highest reading since the survey was launched at the end of 2017.
Interesting charts via The Mad King
Christian Siva-Jothy: “I don't want to sit here and sound like I really think the world's coming to an end…”
Jason Shapiro: “Why not? I do. I can't trade that way, because if I trade that way, then I just lose money, and my world comes to an end, but anyway, go ahead…”
Global Leader Approval Ratings We don’t like ‘em.
I was just getting comfortable that WW3 would eliminate my concern that the world was going to die because more trees can grow when more carbon is in the air, and now you tell me that no quartz means we can't make all the weapons that will start WW3? What is it that I should worry, and how is it that humanity isn't one giant fetal ball rolled up in the corner?
I love the dog from "The Thing." It's a perfect metaphor for the Fed and the American people. "It ain't like us see, it's different." The only way to save yourself is to burn everything down....