October 1, 2023

Imploded Stocks
Brick & Mortar
California Daydreamin’
Cars & Trucks
Commercial Property
Companies & Markets
Credit Bubble
Europe’s Dilemmas
Federal Reserve
Housing Bubble 2
Inflation & Devaluation
It’s like a dam broke. And now higher interest rates and mortgage rates for much longer, with lower asset prices, as the Everything Bubble gets repriced.

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Numerous typos in the closed caption options. The worst of which is the final statement that lists Wolf’s site as WallStreet.com.
Complain to YouTube about it :-]
I find captions very distracting.
“I find captions very distracting.”
Timely. There’s a NY Times article this weekend on the growing popularity of using captions all the time. Highly correlated to age (younger, predictably, prefer using them).
Wolf covers the liquidity part of problem well.
There is another problem that needs addressing:
1. Fed and govt can only print currency but cannot create goods and services that readonly represents.
2. Slow QT will soon trigger layoffs as many companies will need to reduce non-profitable operations.
3. Under slow QT asset prices remain high that causes costs to remain high that in tun makes many productive operations non-proditable.
3. So these layoffs will reduce consumption and production both at the same time thereby not helping inflation.
The right way to fix this would be a single 600 basis point Shock and Awe rate hike to match inflation rate.
1. This would correct Asset prices really fast making many productive operations profitable.
2. So while there will sti) be layoffs an non-productive operations will wind down, the productive operations will remain.
3. This production of goods and services will provide sufficient supply to control inflation.
“Under slow QT asset prices remain high that causes costs to remain high that in tun makes many productive operations non-proditable.”
The effects of QT aren’t a mechanical process. Look at the central banks that used it. In the US, the impact was mostly seen in the stock market. In the Eurozone, stock markets are below the 2007 or even 1999 highs.
Wa this would also probably start a war
Governments are fighting the fed tooth and nail. Here in Pennsylvania, the governor wants to hand out $2,000 checks to every household that earns less than $80k.
You can’t make this stuff up.
Gee that’s not inflationary IS IT!!?
Sounds like the governor is trying to buy votes.
I received $600 from Governor Newsom. He did not receive my vote in the primary election because I think that money should have been spent addressing California’s serious problems, such as the water shortage, forest fires, homelessness. Now, the state is handing out money for people to use to buy a house they can’t afford. What are these people going to do when they have to pay for a new roof, etc.? I wish politicians would extend their cognitive time horizon beyond the next election cycle.
These are legal ways to buy votes.
If the government finds itself with extra money to hand out on a whim, it’s prima facie evidence that tax rates are too high.
So many statewide problems, including excess outstanding bonds, and they come up with a vote-buying scheme…
Right wingers in my state are always screaming that the state should give back excess tax dollars. Now it’s happening, they’re screaming about it. 😀
Revenues in CA are already coming down hard due to capital gains tax shortfalls, and sales tax shortfalls. Particularly capital gains taxes are huge for California, and when the markets head south for long enough, the state runs out of money again.
Right now, the state is still sitting on a mountain of pandemic money, and it will continue to spend it, but with revenue shortfalls lining up, eventually, the state will be back to budget cutting and program cutting, and then paying with IOUs because it ran out of real money. None of this stuff lasts forever.
Don’t worry, the problem will soon solve itself when the US economy first enters a severe recession and later in the future an economic depression.
There won’t be any state money for MMT then.
But at least we did not go into a depression when the CoVid pandemic first started raging. It would have really been bad for us Americans being in a depression AND everyone Sick with CoVid and Hungry and Broke!!! and no way to fund tax revenues to finance the method to figure such a large mess out. Remember the GDP was down like -16% the first quarter and then -36% the next quarter but after the stimulus it was positive in the third. If it was negative in the 3rd quarter this would have been the definition or at least the start of the definition of a depression.. You have to admit that even though the “can may have been just kicked down the road” the overall soloution will be a lot milder because it was properly thought out and executed.
You lost me at covid. It was handled just as badly as is inflation “crisis”.
Both should have just run its course on its own. Lockdowns, QE did more damage than it did good. “Experts” are finally slowly admitting how biased their decisions were.
Politicians are neither health experts nor economists.
Every HOUSEHOLD? So every dude or dudette living alone in an Artist Loft, same as a family of seven?
Thank you Wolf for another great podcast. How high do you think mortgage interest rates will have to go to get inflation under control?
I wish I knew. It’s not only “how high,” but also “how long.”
Wolf, I think we will see Fed Funds at the high end of the range at 7% to 8% by the middle of 2023 (all Fed rate tightening for naught if inflation stays in the 6% to 8% range, so they must approach/exceed inflation via Fed interest rates) and mortgage rates, based off what the spread from the 10-year Treasury Note usually/historically is at 200 basis points for 30-year mortgages, approaching 9% to 10% by year’s end.
That would be looking at a flat yield curve from the 2 year to the 10 year note which could be possible as a recession takes further hold. But there would be time premium pressure due to persistent inflation to push the 10 year to a 100 basis point to 150 basis point premium over the 2-year.
Seems to be some form of consensus developing on Wall Street that the Fed will be done tightening short-term interest rates by the end of 2022. I think they will only be 2/3rds thru. QT will raises the rates at the intermediate to long-term levels, but at a very, very progressive (aka, slow) rate. Usually, pegged at the 10-year to 30-year maturities. Now, demand for mortgages due to skyrocketing Costs to Carry a residence, not to mention sellers who have not see the reduce-the-price memo, will subside as they have already in 2022. So my frosted crystall ball says 8.5% to 9.0% mortgages by Xmas 2023.
It has to happen fast to get the drunk American economy, having swilled on liquidity for almost 1.5 decades now, into the recovery ward before the DT’s set in. Only The Shadow knows how long these money prices (interest rates) will last. Think longer than any of us expect at this point in the new cycle.
The Empire must sell its debt. The Empire will throw any and all assets under the bus to this end. My wealth and your wealth if tied up in assets in the way of selling the Empires’s debt will be liquidated. I am buying the Empires debt by buying short term treasury notes and rolling them over every 4 and 8 weeks. I am a good little empire citizen and do not want to get caught under the driving wheels of the empire.
Wolf, your comments brings to memory my younger days of using dogs to hunt wild hogs in the swamp. We used Pit Bulls to catch the hogs and load into trucks in cages. Those dogs never let go!
At my age then this was a fun activity. Not so much any more.
I don’t have a dog to catch this inflation. I can however do the same I did during the 80s. I invested two thousand each, three years after IRAs were made and ended with $27,000. Worked fine but later investments not so well. Prime rate back then as memory says was 21%. Getting old so don’t hold me to facts.
I’m looking at the same situation today without needing to buy a house and no money available. As said before I went contract for deed. The owner also had a loan payment for the same as my agreement. He and the loan company stayed in contact and when money became available I closed the contract.
Sometimes funny how life was back then. Honesty was very important,
Today I am looking for CD’s with a reasonable return on investment. Guess the world truly does revolve in a circle.
Much like hunting rabbits with a good dog!
Enjoy all the excellent data and the comments.
Need another mug if only I can remember to send the check/donation.
Rates peaked at 16.63% in 1981.
Which shows how far off the Fed is in fighting inflation.
Which rates — 1 year treasury bills, 10 year treasuries, 30 year treasuries, 30 year mortgages? It makes a difference.
Captain Obvious would say that interest rates will need to keep going up until inflation comes down.
Insurance may not be in short supply, but the services they pay for have increased in costs, hence the premium increases.
Yes, that’s how inflation works, how it keeps cycling through the economy. Businesses whose insurance costs jumped pass on those premium increases in their prices, and it just keeps going. This is one of the reasons it’s so difficult to get inflation under control when prices of services rise.
Hence a good opportunity to gouge, need it or not.
My car is worth a little less this year and I’m driving much less. My home value peaked probably last year during the latest housing fiasco and is losing some ground now.
What corporation or bank is not going to take advantage of the situation?
For a lot of services, the scarcity of labor IS sort of a supply chain issue. Skilled labor in particular is a critical input to most services.
Actions of the Fed and the federal government continue to be blamed on incompetence. But if one looks back through history, you’ll see there have been a great many periods of increases in a country’s money supply, and periods of inflation. Surely people at the Fed and in the government have studied economic history, and from that know what dramatic increases in a money supply will do. Which leads one to suspect that what has taken place is deliberate.
They may have studied history, but sorry to report:
“The only thing that we learn from history is that we learn nothing from history.”
Hey Wolf, first I will preface this by saying I haven’t yet LTTGDFP. As a rule, I don’t listen to podcasts, but I have made a few exceptions with your’s and will listen to this one later at my convenience…
That being said, the reason I am posting a comment today, is something I read earlier today. It brought up a point I hadn’t considered much and I think it pertains to the subject matter at hand….
Do you think there’s any validity to the idea posted below?
Per Sarah Wolfe in US Economics, about half of all the income in the US is earned by households making more than $100,000 per year. Most of these households own their own homes, and either have no mortgage or have refinanced into a 30-year fixed-rate mortgage at an extremely low rate. This means that the largest expense for these households is not rising even as the Fed is hiking, but their wages are (median wage growth in the US is ~6.5%, per the Atlanta Fed). For many of these households, which represent a large share of national income, financial conditions aren’t tightening, they’re easing. This may help to explain why core inflation is so ‘sticky’ on the way down.
Rosarito Dave,
1. Agree – and it’s well established – that wealthy high-income households experience inflation a LOT LESS than households that have to spend their entire income on necessities. Even the Fed has mentioned this a lot in recent months (Powell, Brainard, Fed papers).
2. Financial conditions are related to the costs and difficulties of borrowing. So if those high-income households don’t need to take on new debt, they don’t feel tightening financial conditions.
3. But wealthy households are much more exposed to asset price declines (stocks, bonds, real estate, etc.) since the top 20% on the wealth scale own the vast majority of assets. So that’s where they’re feeling it. But they’ll be just fine if they’re – as you state – not leveraged. They will still have a lot, even if it’s a lot less. That’s why asset price declines (through QT) have relatively little impact on the overall economy.
Anecdotal.. my friends who are multi millionaires are tightening their purses because they lost a lot in asset market
Are there any available reports in FRED that shows monthly QT & QE? I track Fed Reserve Borrowings and Money Supply but not sure if that will show QT. Thanks!
Brady Boyd,
You can find everything right here. I do them monthly when the balance sheet comes out that has the month-end Treasury roll-off on it. Last one Sep 1, including lots of charts by asset classes and total, plus all the relevant explanations, about MBS, TIPS, and all the other complications:
I will publish the next one on Oct 6, when the balance sheet comes out that has the month-end Treasury roll-off from Sept 30 on it.
You can get all my Fed articles here:
Several very well-to-do retired friends own two or more very nice homes, total real estate tax bill $50k or more per year. They’re members of an investment club I joined entirely to widen my social circle. A state goal of the club is that members will cooperate in trying to find stocks that will go up 25% in a year. Of course in the ZIRP-and-QE fueled bull market of the last 20 years they’ve been able to find some, and almost anything they bought went up some percent. Holdings dominated by Apple, Google and Amazon, all bought years ago, so still in the black. No thought of selling them despite declines — sure they’ll come back and go on to new highs.
I asked a member who I know has $50k real estate taxes whether he can pay all his living costs from dividends and interest. Nope, he needs to sell stocks to pay the bills.
Wealthiest member (one of the multi-home owners) is huge fan of Disney, though in 70s goes to parks frequently, has gotten club to keep buying into it, averaging down, touts its move into streaming, counters my arguments that their price hikes are going to cost customers by observing that parks are still packed. Can he pay his bills just from dividends and interest, or does he too need to sell some stock every year?
None of these people can imagine that the market is going to fall 80% as it did in the dot-com crash (and in Japan in the 1990s crash). And anyway they’d be sure it would come back as it did post-dot-com crash (not stay down for years as Japan did, or as the U.S. market did in the 70s). It’s a fairly safe bet that they have envisioned continuing to support their life-styles by selling small fractions of portfolios of stocks at prices above current levels and steadily increasing, not at levels half of or even less than current prices.
It’s clear they cannot imagine that the inflation-adjusted S&P 500 could again fall as it did from December ’72 through September ’74 and then not reliably rise again above the low until September ’82, and not recover the high until August ’87 — or that the U.S. market could behave as the Nikkei 225 has since the 1990 peak.
Use the sliders on the data at
Of course if stocks fall 50%, and you’ve got to sell to support your life-style, you have to sell twice as much, and your nest egg disappears much more rapidly than you expected, especially if you were sure they could only go up.
Note that the inflation-adjusted S&P 500 did not recover reliably above its November ’68 peak until December ’94, and had more-or-less recovered only by 1989.
I’m not Wolf, but I’ll throw in a partial answer. Financial conditions may be easing for some, from a daily P&L or cashflow perspective. However, those are also the owners of a whole lot of the nations assets, and those assets are getting crushed much harder (and on a larger basis) than their incomes are gaining. So from a balance sheet perspective, their financial conditions are tightening.
Before anyone says “ahhh, but they don’t need that money, so it doesn’t matter.” Well, since the purchasing power of those assets is falling from the crushing AND inflation, and money is only useful to buy stuff (don’t nitpick here), their futures are still tighter.
Thanks for the replies, however I’m thinking that these households still have the wherewithal to be willing to pay higher prices for rising service prices, especially as their wages are increasing. As this seems to be the stickiest part of inflation, I can’t see how that will go down quickly just by raising rates. Yes… eventually everything will level out and maybe start coming down, but not in the near future…
Thinking that from this podcast and what Wolf has said elsewhere, if anything QT is even more important than the interest rate hikes to help bring inflation under control quickly. The rate hikes are important, and the Fed should be looking at minimum 125 basis points or even a 1.5 percent hike in the next meeting and inter-meeting hikes, as Volcker did. But like Wolf has said, the QT hits the asset prices of the big asset holders and wealthiest households, and major speculators, who have the least to worry about as far as their total portfolios (which will still be quite high). A smart move for the Fed would be to rev up QT even faster, which is after all one of the tools they have at their disposal that even Volcker didn’t in the early 1980’s when he went aggressive with the rate hikes.
I have said this ~1.5 years ago…
Massive-deep recession/lot of jobs losses will be needed to fix inflation.
Stat I won’t disagree with but the conclusion I would like to challenge. Retirees are on fixed incomes that went negative with inflation and ZIRP. For the high earners I agree that they have not reduced which shows up in the retail sales data.
Hense the interest rates need to rise much more. Wolf mentions that inflation impacts low wage earners and retiree much more than the top wage earners. These same wage earners because of what u mentioned low Mtg good balance sheets takes longer for them to slow down. Hence inflation for longer.
This is mostly true from what we’ve seen working in and with the tech sector, the one part we’d question is the wage growth side–we’re not really seeing that much. Companies have been doing everything in their power not to raise wages for established workers, even high skilled tech workers, to the point of trying to hire cheap labor (thru things like H1B) for other tasks instead of raising salaries for Americans. In other words companies are trying to force the workers (including high-paid high-skilled Americans with well into 6-figure salaries) to eat the costs of inflation instead of allowing for even modest cost-of-living raises, one of the reasons why raging inflation can so easily lead to social unrest and breakdown of society–the people actually doing the work have the least power to demand that their incomes catch up with inflation.
The usual response we get to this is “just switch jobs” since yes, the higher salaries usually come with signing up for a new position instead of staying with the job you already have. This sounds nice in theory but it seems like those sorts of articles are disconnected from the real world, and how difficult it is in practice to just quit and pick up another job, even for someone with very in-demand skills, from what we’ve seen in nearly every state’s high-tech jobs sector. You’re making a guess about how the work environment of the other company is and how willing they are to keep you on board, the company you’re leaving may be less than interested in giving you a reference (not to mention non-compete restrictions), you may well have to move to a different area (very difficult to do if you’re indeed a homeowner, even if home values are rising–and now of course they’re falling), may have to send the kids to different schools.
Plus a lot of these tech jobs are very specialized and specific and it can be hard to transfer skills over so easily, and even under the best circumstances, with all the HR screening and the multiple documents to get on-boarded, you’re looking at a delay of at least 2-3 months and usually more to actually start working at the new company, with all the headaches of making sure you have health insurance to cover costs if you, the spouse or kids get sick. (And Lord help you if you get divorced–the divorce courts in the US and Canada at least are profit centers for the lawyers and the state, and even high-earning divorcing couples get drained of earnings and savings, if I were a good-earning young American interested in starting a family it’s almost enough to suggest moving overseas instead.) So we’re seeing most of the things you’re talking about, but not really seeing this wage growth, certainly not for tech workers who stay with their companies (and again it’s much harder than the headline talk indicates to “just switch jobs”)–companies esp in specialized sectors with specific, high-competency positions and skills really do seem to be doing everything they can to not grant raises to help workers, even very proficient and experienced ones, deal with this inflation. Another reason the Fed needs to go full Paul Volcker to get it under control.
My employer sprung for a 1% across the board COLA last quarter.
And while it didn’t nudge me any nearer to the cornucopia most of my fellow Americans enjoy — these savvy hyper-numerate investor geniuses who’re are apparently just lousy with cash, and carrying no credit card debt, and shopping shopping shopping — I did appreciate the thought…
sort of…
The 81st to 90th percentiles of the top 20% aren’t wealthy, only somewhat well off and this also depends upon where they live and household size among other factors. In any large metropolitan area, definitely middle class.
Most of their wealth is also in home equity and/or tax deferred retirement accounts meaning they don’t usually have access to meaningfully large spending cash.
Like everyone else, they are also mostly almost entirely dependent upon wage income for their current affluence.
So basically, they can spend while the labor market is tight but that can change quickly for most of them.
The data is mostly public for those who don’t believe this description.
I was shocked to find my net worth is around 80th percentile for households. No way am I wealthy.
More shocking is the financial condition of those in the 79 percentiles below me, which must be truly awful. Something like (paraphrasing Lenin) 3 meals away from chaos.
Net worth is very age-dependent. Very few people under 40 or 50 have saved for long enough to have much net worth yet. That accounts for 1/3 to 1/2 of households.
In the data I saw (from 2019 … bit stale), $1,000,000 in net worth put one at the 88th percentile. Simply having $0 in net worth (i.e. not being mired in debt) put one in the 11th percentile.
It’s also state-of-residence dependent. States with bigger housing bubbles generate higher-net-worths from home equity.
Bet the housing bust (just getting started) does more percent-damage to most people’s net worth than the stock&bond market bear-market.
Last year the Fed’s strategy was to do nothing, hoping inflation would go away on its own. This year the strategy seems to be to do little and as slowly as possible.
Locally they are or are hoping to increase taxes and spending at every level of government, and I’m sure voters will be good little zombies come November and continue to vote in favor of tax and spending increases, as taxes only apply to others, or each little increase is so insignificant why not. Plus we have to vote with our heart rather than our brain.
Most voters still haven’t figured out bonds are loans that have to be paid back with interest which results in increased government spending and the need for increased taxes.
They also believe federal money is free money that others pay, not themselves, or that if we don’t spend it someone else will, so we must.
All meaning, as Wolf states, inflation is here to stay until great damage has been done to the economy and individual finance.
Wolf, my son age 40 has long been a fan of yours, and recently urged me to subscribe. I wish i had done so sooner.
A small point: your saying the Fed is trying to “repress” inflation caused me to look up some definitions. You might enjoy, it’s kinda fun:
“To oppress means to keep (someone) down by unjust force or authority. To repress is (1) to hold back, or (2) to put down by force.
Suppress, which is broader and more common than the other two, means (1) to put an end to, (2) to inhibit, and (3) to keep from being revealed.”
You might be right that it is “repress” but as you reflect, governments have not yet been forceful. Hmmm.
What I said was “interest rate repression” — meaning until its pivot late last year, the Fed lowered its policy rates to near 0% and kept it there, and it engaged in QE to repress long-term interest rates. I’ve used this term a gazillion times over the years.
I’ve also used “financial repression” in the past (not in this podcast) — which is a technical term about pushing interest rates well below the rate of inflation.
“Inflation repression” is not anything I ever said, but heck, I might if the Fed is actually able to do it :-]
It’s one thing to read Wolf’s articles and try to digest just how serious and long-lasting the inflation is. It’s quite another to hear him elaborate in his own voice. I came away very concerned & looking to make further adjustments on spending and investing starting tomorrow. Thank you Wolf, for the warnings.
Yeah, I came away with the same concern. For one thing, before this podcast by Wolf, I have totally ignored the impact of state and local government spending on inflation. He mentions it three times I believe. I will have to look into that further.
1) SPX monthly for fun and entertainment only :
SPX built a Lazer tilting up between 2004 and 2006. After twelve years,
in Dec 2020, SPX came from below and moved in. Jan 2018, Feb 2020
and Sept 2020 highs are x3 failed attempts to move in.
2) SPX osc above the Lazer until Jan 2022, below in June 2022. Options :
3) Option #1 : SPX will plunge after losing it’s grip last month.
4) Option #2 : June low is good enough. SPX will osc inside and move above
to a new all time high.
5) Option #3 : the next high at 6K/7K will not be the last high. SPX might
move higher for more than a decade, before moving sideways…
1. Difficult to control inflation without triggering a recession.
2.The youtube subtitles are made by NLP – natural language processing AI. The captions can be turned off.
3. If prices of everything is raising how come the how do I explain my salary or T-bills?
4. Inflation in food is what is going to burst the dam.
5. You dont have to wait because its already here
6. Limit of the fed rates is ~5% (my guess). Recession is waiting beyond this limit.
7. May be the rate 5% will stay longer time.
8. Congress passed an important bill to control inflation.
9. Inflation reduction act 2022.This will bring down all the inflation.
10. After november, SPR will stop flowing. Gas prices will be higher again.
“8. Congress passed an important bill to control inflation.”
It just dumped more money into money supply. How is that helping?
I read CobaltProgrammer’s #8 as pure sarcasm, but lacking the /sarc flag. If this is not the case, then clearly CP’s financial acuity may need a slight adjustment.
Expect oil prices to rise again in the near term, probably to $120.
compelling argument that fiscal/monetary is still stimulative and that old COVID $ is still in state coffers. The inflation in services is more concerning because, as you state, there are no supply chain issues there.
I dropped a couple of coins in the jar as a thank you for your analysis. I might have dropped a few more but I have to double my Prozac prescription now
with Europe in such bad shape that might trigger a flood of money moving into U.S. assets such as stocks and real estate. That would be interesting to watch even as the U.S. economy sloes into recession in 2023 and interest rates continue to rise.
Also, the US is offering increased interest rates. I have wondered whether all this is buoying markets up at the moment.
The “carry trade” is borrowing somewhere cheaper, and lending here. That usually pays nickels, but has been known to unwind steeply: one meets the steamroller in front of which one was grasping the nickels.
In the USA, this unwind could take the form of the Fed panicking if a downturn happens too fast, and loosening.
In Canada, a plot of land in the middle of nowhere was valued 5,000 in 2013. After 2020, that same plot of land sold for more than 500,000. Happened a lot in rural Ontario and the Maritime provinces.
The Bank of Canada MUST hike interest rates some more. Hike it higher and higher and disregard the home owning politicians who don’t give a single care about the common Canadian paying double the prices for food compared to five years ago.
I could have bought a tin of sardines for 1 dollar in 2015. Now it’s 2 dollars!
I think a major battle is brewing: the bankers that run the Fed and the federal politicians who want cheap debt to pay off their voters.
When Treasury rates really start to rise due to the appearance of a significant inflation premium, the political pressure will become intense for the Fed to buy those bonds to bring down the rates (especially if they bring pull up the mortgage rates with them and wreak real havoc on the housing market).
Will the 30-year yield be allowed to hit 15% again (or higher) like it did in 1981? If inflation is still raging, the Fed is going to be reluctant to resume QE to buy those bonds to fuel the raging inferno. It would probably only make the problem worse anyway, exaggerating the inflation premium on the 30-year bond and having the opposite effect of what’s intended (much like Operation Twist).
Another problem: the last time QT was enacted, it eventually resulted in a blow-up of the repo market (September 2019). There was a cash shortage, which drove the SOFR rates to 10% against the “price ceiling” of 2.25% imposed by the Fed.
Inflation was only in the 2% “target” range, so the Fed had no problem intervening with unplanned QE to “fix” it.
But what happens next time once the reserve drawdown from QT crosses that critical inflection point and some multi-trilion-dollar market sector experiences sudden and unexpected strains due to a cash shortage?
With inflation still raging, will the Fed intervene again?
If it refuses, the economic gyrations will be profound.
Interesting times ahead.
1. Last time there was QT, inflation was BELOW the Fed’s target. Why do people keep ignoring that?
2. Last time the repo market blew out (late 2019) because a bunch of mortgage REITS ran into trouble which caused banks to stop lending to the repo market. Now the Fed has a standing repo facility (SRF), and it can step in to prevent any such blowout. It got that the SRF set up a year ago in order to be able to manage QT better.
3. Right now, the political pressure is intense for the Fed to BRING DOWN INFLATION — forget all the other stuff.
4. No need for yields to go to 15%. The Fed has QT, which is a powerful tool. That’s why QT will continue, because then short-term rates might only have to go to 4.5% or 5%, and long-term rates a few percentage points above that. For long enough, it will likely do the job.
5. And, although not their mandate… The USD needs a silent backup partner.
I think you nailed it more with this post than with your podcast… and your podcast was GREAT!
People keep forgetting the power of QT. The Fed doesn’t have to raise Fed Funds rates above the inflation rate because QT means that the markets will raise interest rates above the inflation rate on their own. As you say, if they do QT and Fed Funds rate hikes in tandem “for long enough, it will likely do the job.”
The real question is… how long is long enough? Surely the Fed has wargamed that out… I would love to know the results of THAT analysis. My guess is that they would like to end their Balance Sheet reduction prior to lowering Fed Funds rates… which would give us a clue as to how long THEY expect it to take to wring inflation out of the economy.
I strongly agree with your comment about the importance of QT. Above all, QT is enabling a vast repricing exercise to take place.
Interest rates grab all the headlines yet Powell’s assertive speech at Jackson Hole, as perceived, might have amounted to nothing more than an additional 25bps over previous medium term expectations.
I think the game by current Politicians is to spend as much money as possible , as quickly as possible which they feel will then force the Federal Reserve to back them via QE rather than let the whole system crash
If I may. Just a small edit to the end of your sentence:
“I think the game by current Politicians is to spend as much money as possible, as quickly as possible, which they feel …”
… will get them re-elected to another 4 years of snouts in the trough.
Excellent report but not sure how you conclude supply chain issues are no longer a factor. Chips are still an issue and good luck buying a new car.
I’m in the market to pro-actively replace a 25 year old natural gas fired tank hot water heater, manual light standing pilot. Looking for as close to same as possible.
To my horror it seems that most if not all have some sort or electrical dependency and microprocessors. Plumbing supply guy explaining had me at “…the government…”.
Call your internet provider and ask if they can reduce your monthly rate.
Tmobile is offering $50/month for very good 5g home internet (if you are close to a tower). I get 300-500mbps down and 80mps up.
With my tmobile max mobile service, they reduce the home internet to $30/month.
I told Spectrum I wanted to cancel and they offered to drop their monthly from $75 to $39.99. And told me anytime a promotion ends, I can call back and get the latest current deal.
I went with tmobile for $30. So far so good.
I already did, no go. It’s fiber to the house, and it’s still a lot lower than Comcast was. But now Comcast, which has lost lots of customers here when we got fiber and now Verizon’s 5G, is offering a two-year teaser rate on its old coax cable. But to heck with Comcast.
I’ve been wanting to short that stock so bad ever since fiber moved in last September that it was hard to restrain myself. I shoulda…
But. . . but . . . but. . . you said it was transitory?
I wish Bob Fosse were here to dance to this.
Congress needs to encourage production by getting their prohibitive regulations out of the way. I don’t see this happening any time soon for any industry.
I’ve been thinking for a while it may take a lot higher and longer to tame inflation than the stock pumpers claim. Look at all the software companies that have never turned a profit. They enjoyed a decade or more of VC money at near 0 rates and never, ever, thought about making a profit. The insiders made tons via stock options and some of the worker bees probably did ok too but most of that industry is dead, dead, dead. I dont see the bear market being over until companies like that – in whatever sector they happen to be – are gone with the wind.
I feels like we are in the eye of a storm right now. There hasn’t been any really bad news yet. Stocks and RE are still relatively high priced. Unemployment remains low. Consumers are mad about the inflation but they keep spending anyway.
It won’t last.
Having lived through many hurricanes, let me tell you… we aren’t in the eye of the storm yet. This thing isn’t half over and we aren’t on the less dangerous side of it yet. It is more like we are aware that a storm is approaching and we are just boarding up the windows because it is too late to escape.
The weird part is that when a hurricane approaches people turn to the government for information in order to prepare (and survive)… but with this situation the people have been telling the government for over a year now that inflation was an approaching problem only to have the government tell them it was no big deal.
I look at housing needing to come down to late 2020 levels. Or as with my wife and my home that we bought in 2016 at 3% rate for a 30-year mortgage through the VA.
I figure fair market value of our home now is based on an annual appreciation of 3.5%. That means the current estimate market price needs to decline about 20%.
As far as stocks, the S&P 500 is down (again) 19.7% from its 52-week high. I think worst case the S&P 500 may bottom in 2022 around early 2020 levels, which corresponds to about a 33% drop.
This type of shock will give enough jolt to get people to recalibrate how they participate in the economy and may encourage creativity as far as innovation and production gains throughout the economy.
My main concern is the cost of the federal government borrowing money in the near to distant future such as with the 10 Year Treasury rate steadily increasing.
And this increase in servicing /paying the federal debt coincides with a drop in tax revenue due to declining capital gains, etc.
Its quite a conundrum as far it being an optimization effort with minimizing inflation while maximizing economic growth / GDP.
I guess it depends on the specific market you’re in, but where I live, residential real estate was already several exits past crazy town by 2020. A reversion to those numbers would be no great shake-up.
Wolf, towards the end of the podcast you say “it is going to take years to get (inflation) under control” as the government spending is making inflation worse (e.g. EV incentives) while the Fed does what it can with QT and higher interest rates. As you have pointed out in previous posts, the layoffs to date have not been very high but it seems that many companies are cutting back hiring, travel spending and starting to lay people off. If this accelerates and we start seeing mass layoffs, would that also accelerate the timeline for how quickly inflation would get under control? I don’t know how the late 70s and 80s played out but I would expect that it would only take years with QT and slow interest rate increases if the economy was still chugging along but that a major downturn would accelerate the timeline significantly. Is that the right way to think about it?
Either way I think asset prices would go down but the reason I ask is if people expect interest rates to continue to go up and are waiting until higher rates before buying long term bonds, they may miss out on a good opportunity now if the economy turns and rate increases are no longer needed to reign in inflation.
Construction costs and labor cost for anything house related has gone up a lot in the past 5 years.
5 years ago my handyman charged $30/hour and now he charges $45 and is thinking about going to $48.
A local convenience store 5 years ago advertised $12/hour and now they advertise $20/hour.
On the topic of house prices. In 2015, I did some remodeling on a rental home I own. It costs about $18k. I am doing something very similar to another house. It is going to run me at least $35k. Ouch. Basically a 100% increase.
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And this was during the summer rally as mortgage rates dropped to 5%, stocks bounced, the Fed “pivoted,” and the Good Times started all over again.

The purpose of MBS purchases was to repress mortgage rates and inflate home prices. That process has already started to reverse.

Retail sales without gas stations jumped 0.8% in August from July. Inflation shifted away from goods (retailers) to services.

Long-term stagnation turns into sharp decline.

Rate hikes to keep up with the Fed would work. But the Bank of Japan still digs in its heels. Its balance sheet has shrunk for months though.

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