The Economy

Just saw this. No, not happy at all. Maybe I shouldn't direct this at you, but one thing that has mystified me is that there are people on here who seem to think that when I point out how cheap money has fueled extreme misallocations of capital that have among other things driven stock prices up artificially, that it equates to me rooting for something. I'm really not. I wish we could get rid of them and let price discovery work in the debt markets (the best regulator of risk there is), because I think we're all better off for it, but that is also a conversation that gets beyond the stock market bubble that comes with the harm they do to us.

 

One other thing (and yes, I know that three posts in a row is psychotic). ... It's really premature to call it an end to the era of free money. I won't ever make that mistake again, because the Fed has made overtures about stopping the madness several times since the financial crisis when it began its more extreme interventions, and each time when markets freaked out, they stepped in with more (it takes bigger and bigger interventions to prop up the debt pile that already existed, why their behavior is so insidious).

The thing that MAY be different this time is the scope of the inflation. But let's see. They would rather let inflation run, because that inflates away the value of the debt they are responsible for, and it's a more hidden way of passing along the cost of their past actions. But there is a lot of political pressure because rising costs of staples are creating a lot of discontent and politicians are going to get voted out because of it.

So now the Fed is trapped. Try to deal with inflation (and it is not easy to do) and they know they will pop the bubble and it likely means a recesssion unlike anything we have seen before. Don't try to deal with it, and costs keep rising and people may revolt. Which is why they have dithered, bulllshitted and basically turned hope into their main strategy. Like deer in the headlights. At the last Fed meeting, last Wednesday, Powell tried to placate markets by taking rate hikes of more than 50 basis points in the coming months off the table, which created a reflexive rally. ... followed by the bond market saying, "Um no, that isn't going to work this time and if you don't try to deal with the inflation, we'll do it for you."

But right now? The Fed hasn't done much of anything to stop the era of free money. The Fed Funds rate, even with their 50 basis point hike is .83 percent right now! With inflation (the official number, which understates it) running at 7, 8 percent, real rates, are very negative. Money isn't free; you are getting paid a lot to borrow. On top of it, they bought everything in sight during the pandemic to prevent failure from happening, which drove up bond prices and drove yields down. To the point that their balance sheet is more than $9 trillion. They were still expanding that balance sheet as recently as March. They are just TALKING about starting to let those assets roll off, they haven't done a damned thing yet. And we've been here before with them reversing course and ultimately blowing up the balance sheet even further when markets began to freak out.

At this point, I will believe it when I see it. I wouldn't be surprised if they just let inflation run rampant rather than being honest with people by how much they screwed us all with their irresponsibility.

 

Let's go for a fourth post. ....

CPI number in an hour, and for people who trade markets, this one is as big as any data drop I can remember in a long time. The consensus estimate is for a number over 8 percent year over year, but the whisper predictions are that things are peaking due to base effects (i.e. -- we got such a huge run up in the trailing 12 months that the rate of increase has to abate).

Equity markets seem to be anticipating that right now. If the number is hotter than everyone seems to be expecting? There could be even more reflexive selling in equities. We really haven't seen any panic, as much as things have come down.

 

Headline CPI number up 8.3 percent, slightly hotter than expected (expectations were 8.1 percent). The equity futures did dump on the number. Kneejerk. Yields back up. It was swift.

 

Putting aside that these numbers aren't really all that accurate, they do reflect the reality we're all living.

And one main thing from the April CPI that people should understand is that it shows broadly that prices are up 8.3 percent from a year ago, and while wages are up 5.5 percent in the same time period, it means that those wages are being more than offset by broad prices hitting people. It's bad also because wage increases are sticky, once you pay people more it's difficult to take it back, so those higher are likely perpetrating a wage-price spiral that will be sticky. ... and worse, one where the prices are outpacing the rising wages.

It's not great for anyone no matter how you slice it.

 

What Jason Furman isn't saying, even though he knows it.

 

The arsonist is going to ride in on the fire truck now.

 

I was just talking to my niece about this and thought maybe I should throw it up here again for anyone it might help. I posted the above a while back.

In my post above, the website should have been: www.treasurydirect.gov. And because the CPI has run even hotter than when I posted it, the new interest rate for the next 6 months is 9.62 percent.

This is such a no brainer for anyone who has money they want to save in fairly risk-free way. It's one of the only things out there that will earn most people a positive real rate of return (after the effects of inflation, at least the way the CPI measures inflation) without any risk.

It only makes sense when inflation is running hot and real interest rates are very negative, the exact confluence of factors that the Fed has given us. And because they can't raies the overnight rate and/or start dumping the trillions of dollars of assets they accumulated fast enough to get real yields positive without causing a recession and /or a credit crisis, those factors aren't likely to change anytime soon.