Posts with tag inflation

WITH RISING PRICES AND INTEREST RATES, IS A RECESSION AROUND THE CORNER?

Guest Writer, June 15 2022

Stocks, bonds and precious metals plummeted again today as Wall Street reacted with continuing, unencumbered knee jerks to soaring inflation.

It appears there’s widespread distrust and a self-fulfilling fear among investors about how forceful the Federal Reserve will be as it tries to put the evil genie back in the bottle.

The S&P 500 is now officially in a bear market, down nearly 22% since it hit its most recent high on January 3rd.

Matt Phillips writes that these market moves highlight the deeply uncertain outlook after more than a decade of growth for stocks and gold and low bond yields that made borrowing more affordable than ever for investors and consumers alike.

So affordable, in fact, that U.S. consumers’ collective personal debt has risen to over $23 trillion – about $69,800 per citizen.

The S&P 500 benchmark index closed down 3.9% on the day. The Nasdaq composite index fell 4.7%. The yield on 10-year Treasuries climbed 0.22 points to 3.39%. 

Plus, bitcoin is down another 14%+ over the past 24 hours, and rates on the 30-year fixed mortgage hit 6.13%.

Spiking prices are overshadowing the Fed’s policy meeting tomorrow and Wednesday, where the Federal Open Market Committee will almost certainly hike interest rates by at least another half a percentage point.

Inflation is driving prices upward at the highest level in over 40 years, leaving the Fed with little wiggle room to cut interest rates in the face of dizzying markets — as it has done repeatedly in recent years, most recently in 2019.

For now, the markets will have to figure out how to live without the support of the Fed.

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RECESSION OR NOT, HOLD ON FOR A BUMPY RIDE

Guest Writer, June 18 2022

By Dave Allen for Discount Gold & Silver

On yesterday’s Financial Survival podcast/radio program, I observed that getting the price of oil down is really the whole ballgame when it comes to how, why and when the Federal Reserve plans to bring down inflation.

And if it doesn't go down – substantially – then the Fed will only go harder and faster on rate hikes to try to scale back demand – ill-advised as that may end up being.

Whatever the case, that level of unwarranted monetary tightening will mean markets further spiraling downward and sending the economy into a recession sooner – and possibly deeper – than we think. 

 

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OIL REFINERS’ PROFITS HAVE SOARED - Is It Corporate Greed or Supply and Demand?

Guest Writer, June 25 2022

Crack spreads — vernacular for oil refiners’ profits — have soared this year as gasoline demand outstrips supply.

They measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.

Matt Phillips of Axios believes crack spreads will see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.

Already, stocks of the major oil refiners got hammered on Wednesday, heading into yesterday’s meeting between Energy Secretary Jennifer Granholm and top industry executives.

Marathon Oil fell 7%, Phillips 66 and Conoco Phillips both dropped 6%, while Chevron and Exxon both fell about 4%.

President Biden publicly is urging an increase in U.S. refinery production, saying bluntly, "I'm calling on the industry to refine more oil into gasoline and to bring down gas prices."

But earlier this year, as crack spreads soared, so did the share prices of major American refining companies, which are up a whopping 38% since January – even as the S&P 500 index has entered bear territory.

While surging profit margins for the makers of gasoline open the industry up to charges of price gouging, industry officials claim that they’re producing as much gas as they can right now.

Industry capacity utilization is running at 94% these days – the highest since 2018 when it hit 97%.

But a recent government report also showed that overall refining capacity has fallen in the last two years. 

In fact, it’s now back down to where it was in 2014, meaning that supply will remain hurt even if refineries were to run at 100%.

So, with little chance of bringing new sources of gasoline – domestic or imported – online anytime soon, the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.

That, I predict, will become a growing source of agita for investors in oil companies – and other industries. 

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CONSUMERS SEE INFLATION COMING DOWN - But Still 80% Higher Than Fed’s Goal

Guest Writer, July 13 2022

The Federal Reserve’s dual mandate is to promote stable prices and maximize employment. Today, we take a look at how current events are affecting those policy mandates.

Early Pandemic Layoffs Driving Today’s Labor Shortages

One only has to recall the infancy of the pandemic to see why employers in a broad range of industries are struggling with historic labor shortages.

Decisions made in 2020 to cut staff appear to be a root cause of many 2022 frustrations, according to Courtenay Brown and Neil Irwin of Axios.

The industries hardest hit at the pandemic's onset — restaurants, hotels and airlines — are now those seeing a boom in demand. 

Even with higher pay, though, they're struggling to replace the workers they laid off back then – some of whom have moved to other industries where the pay is comparable or higher and working conditions are better.

The worker shortage has pushed businesses to raise wages rapidly, which has, in turn, kept inflation elevated. 

On the other hand, this dynamic has been more subdued in Europe.

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INFLATION IS SOARING, INTEREST RATES ARE UP - What Could Go Wrong?

Guest Writer, July 16 2022

Before anyone had time to fully explain June's inflation numbers, the growls had already begun on trading desks and research shops: 

Maybe in two weeks the Fed will raise interest rates by a full percentage point — the most at a single meeting in its modern history. 

This increasingly likely scenario shows the jam the Fed has gotten itself into, with Fed officials seeking to express to the country a whatever-it-takes attitude. Neil Irwin and Courtenay Brown say that’s put them in a corner.

            It’s a precarious situation where high inflation reports demand a mounting series of interest rate hikes and other policy moves that end with reduced consumer and business spending and a cratering economy.

Just last month, a high May inflation reading drove Fed leaders to make a last-minute shift to raise interest rates by 75 basis points, not the 50-point increase they had been signaling.

Well, here we go again. Wednesday's BLS report showed a 9.1% rise in the Consumer Price Index over the last year — and perhaps more significantly, the uptick of monthly core inflation to 0.7% in June.

And yesterday’s Producer Price Index, which essentially reflects wholesale prices charged to retailers, was even higher – at 11.3%.

It was a "major league disappointment," as Fed governor Christopher Waller said in a speech afterwards. The stock markets agreed.

The reports set off alarm bells throughout the financial world that recent history would repeat itself and, by day's end, the CME futures markets would almost fully price in a one-percentage-point rate hike at the end of the month.

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TOO BIG TO FAIL BANKS’ EARNINGS FALL - Could It be Worse?

Guest Writer, July 20 2022

In one of his lesser-known songs, “Easy Money,” legendary singer-songwriter Billy Joel writes:

I want the easy, easy money

I could get lucky, things could go right

I want the easy, easy money

Maybe just this time, maybe tonight.

 

Things aren’t so easy these days for the too big to fail banks whose financial shenanigans are coming home to roost. 

Profits at mega Wall Street banks took a nosedive in the 2nd quarter, as "easy money" policies that made the pandemic era a boom time in lower Manhattan come to a close.

The latest earnings reports show that Goldman Sachs and Bank of America earned smaller profits than a year earlier. Ditto for Wells Fargo, Citigroup, JPMorgan Chase and Morgan Stanley.

Free money on Wall Street — a side effect of the “emergency” monetary policies the Fed implemented to keep the pandemic from imploding the economy — has been winding down over the last few months.

The Fed started cutting interest rates in March 2020 – slashing them to virtually 0% and began printing trillions of dollars and pumping them into financial markets, if not the economy as a whole.

And as Matt Phillips points out, that turbocharged Wall Street – driving public stock offerings and corporate bond sales, advising and financing big mergers and acquisitions, and operating hyperactive trading desks.

Bank stocks themselves surged, too. A year after the stock market hit bottom in March 2020, Morgan Stanley was up 200%, Goldman Sachs was up 150%, while Bank of America and Citigroup had doubled. 

The S&P 500 grew by a measly 75% over that same time.

Fast forward to 2022: interest rates have begun to take off, rapidly changing the conditions in financial markets and slowing down business in the New Normal.

High rates have been crushing stock prices as of late and pushing the S&P 500 into bear territory, and now, companies are getting antsy about what new business to write in a down economy.

The business of managing new corporate bond sales is also sagging as interest rates rise – with companies not wanting to borrow at the new, outrageously high rates (2-3%!).

And, as Phillips notes, higher borrowing costs – which the Fed is using to try to ease inflation – also increase the risk of recession and the losses on loans that normally occur during downturns. 

So, banks are socking away billions in reserves just in case things get ugly, which hurts their earnings. 

But it's not all bad on Wall Street. In fact, volatility can be good for bank trading desks that make the right calls. Trading was a bright spot for Goldman and Citi this last quarter.

Higher interest rates can also boost the money that banks make by charging interest – Bank of America, for one, did just that.

But overall, higher interest rates in the months ahead mean tighter margins for big banks – with stagnant dividend payments, less share buybacks and more circumspect credit for the rest of us.

Could It Get Worse?

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KEEP ON TRUCKIN’ - More Truckers Cruising, More Needed

Guest Writer, July 27 2022

I’ve always been fascinated by trucks – big trucks; the ones with 18 wheels – and the men and women who drive them.

My first full-time job offer out of college way back in the day was from the American Trucking Association. That I declined that position to take one with another DC nonprofit didn’t negate my lifelong fascination. 

One of my fondest memories of that era is my casual friendship with a guy who worked for National Geographic during the week and drove 500-1,000 miles roundtrip on weekends as an independent truck driver.

When he retired from National Geo, he drove a lot more miles every week in his big truck to support his true love (well, actually, true loves – if you count his lovely wife!).

When I read over a year ago about the nation’s big shortage of truck drivers, I worried about people like my old friend, not to mention its impact on our economy, with already messed-up supply chains.

More Truckers Than Ever

But today, more than 18 months later, Axios’ Emily Peck asks, what trucker shortage? 

She writes that employers have managed to find and hire over 115,000 new truckers since the depths of the pandemic in 2020.

At the height of the supply chain crisis, which is still ongoing, transportation companies pointed to a shortage of truckers as a contributing factor. 

Truckers and their advocates were quick to point out that low pay, poor working conditions and high turnover were driving the growing problem.

Now, Peck says the shortage is getting better, even possibly over – pointing to a report from transportation market research group ACT, which notes, "The driver supply flipped from shortage to surplus in early 2022." 

The surge in hiring, according to Peck, comes as big wage increases and demand for trucks to deliver all the goods we've been buying are bringing loads of new drivers to the profession. 

            Plus, she adds, some of the health constraints of the pandemic have begun to fade away.

Now that federal stimulus checks are a thing of the past and prices are surging, driving a truck – in an industry with wage growth that’s outpacing inflation – looks unusually appealing.

Andrzej Tomczyk of too big to fail Goldman Sachs said employers "have been trying to hire like crazy ever since the pandemic-induced demand surge led to relative capacity constraints in the industry. So, it’s likely a reflection of some catch-up coming online."

Over 20,000 more long-haul truckers got jobs in May, the largest monthly addition of new truckers since 1997 – when the Bureau of Labor Statistics started tracking.

In fact, long-haul trucking employment is now 2% above pre-pandemic levels. And average weekly earnings were about 11% higher in May, compared to a year ago, for drivers in freight trucking.

According to BLS, the average weekly earnings of truck drivers have increased about 33% from January 2018 to May 2022, to $1,215 – which equates to $63,000 a year. 

Many veteran and independent long-haul drivers earn a lot more. Recently, more drivers have bought their own truck and, according to Peck, are taking advantage of surging "spot prices" (live market rates) for hauling.

"A lot of people who wouldn't normally be a truck driver" became truck drivers, observed Kenny Vieth, president of ACT.

As the chart above shows, there are now a new millennium high of 1.1 million general freight truck drivers – up 28% from about 860,000 at the depths of the Great Recession.

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More Random Thoughts

Bob Rinear, July 30 2022

I want to take a break in the self/home defense series and chat a bit about recent economic developments, including gold.

So the Feds tossed another 75 basis point hike on us this week. That was totally expected. They have to look like they’re doing something to combat the worst inflation in 40 years.

But in this world, in the year 2022, nothing is as it seems. Nothing is as it should be. See, on one hand they’re hiking rates into a slow economy, which is a recipe for disaster. But on the other hand, the one they hide behind their back, they’re buying up about 320 million dollars worth of assets per day.

Why is that? Remember a couple weeks back, where the ECB put out a news blurb that literally caught me so off guard, I had to rethink a lot of things? That blurb said that the ECB would use “unlimited” resources to keep the debt market intact.

The European Central Bank will unveil an unlimited bond-buying tool next week to help markets better adjust to steeper and faster interest-rate increases than previously thought, economists surveyed by Bloomberg say.

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HOW MUCH WILL UNEMPLOYMENT RISE AS FED RATE HIKES CONTINUE?

Guest Writer, August 3 2022

Debate is flourishing on Wall Street and at Main Street kitchen tables over the Federal Reserve's fight to lower inflation and how high unemployment will jump as a result.

            On the one hand, Fed policymakers believe its rate hikes will eventually drive down strong demand in the economy without causing too much pain in the job market – in other words, a soft landing.

On the other hand, influential economists like Larry Summers say the Fed's ideal outcome hasn't materialized before, and there's no reason to think it will now.

The fight is being debated in various academic papers, but the real stakes for workers and their families are high. 

Courtenay Brown and Neil Irwin write today that the issue “is not whether unemployment rises, but by how much as the Fed tightens.”

They believe the crux of the debate is the inverse relationship between unfilled job openings and the unemployment rate. 

Other things being equal, as job vacancies rise, unemployment falls and vice versa.

As of May, job openings trended lower but remained near their highest levels ever at 11.3 million. 

Plus, the headline unemployment rate is holding near a half-century low (remember, the headline rate is significantly underreported).

The result is an unprecedented 1.9 job openings for each unemployed worker.

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DO CONSUMER INFLATION EXPECTATIONS SUGGEST RELIEF IS COMING?

Guest Writer, August 10 2022

Americans expect inflation to drop precipitously over the next three years, according to the New York Fed. 

And Neil Irwin says “that's great news for anyone who doesn't want current prices to become the new normal.”

The NY Fed’s July Survey of Consumer Expectations, released today, shows marked drops in how households expect inflation to be across a variety of time horizons.

History shows that the higher we expect inflation to be, the more likely it becomes a self-fulfilling prophecy as businesses feel more comfortable raising prices and workers demand steeper wages.

In that sense, Irwin says falling inflation expectations “are a welcome sign that the high inflation of the last year is not causing a long-lasting shift in Americans' psychology around money.”

But inflation expectations in the July survey remain far above the levels that we saw in the years before the pandemic and are above the 2% inflation rate the Fed target.

In fact, consumers expect inflation to be 6.2% over the next year. That’s down from 6.8% in June and is the steepest one-month drop since the survey began nine years ago (CPI rose an annual 9.1% in June).

The potential good news lies in expectations over the next three years having fallen to 3.2% from 3.6%, and 5-year expectations to 2.3% from 2.8%

Irwin reports that the drop was most evident among survey respondents making less than $50,000.

He surmises that’s a possible reflection of those consumers, who were most affected by soaring oil and gasoline prices, seeing relief at gas pumps last month.

Fed chair Jerome Powell mentioned the NY Fed's results as a reason to continue aggressive rate increases at the Federal Open Market Committee’s June policy meeting. 

Thus, Irwin believes the falling expectations “will likely give comfort to the central bank.”

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BIG OIL PROFITS SURGE - AS PRICES AT THE PUMP CONTINUE TO FALL

Guest Writer, August 17 2022

In late June, I wrote in how crack spreads would “see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.”

Crack spreads measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.

The spreads – aka oil refiners’ profits — have soared this year as gasoline demand outstrips supply.

While surging profit margins for the makers of gasoline have opened the industry up to charges of price gouging, industry officials claim they’re producing as much gas as they can these days.

Industry capacity utilization was running at 94% as the summer began – the highest since 2018 when it hit 97%.

At the same time, a Department of Energy report also showed that overall refining capacity has fallen in the last two years. In fact, it’s now back down to where it was in 2014, meaning that supply would be stifled even if refineries were to run at 100%.

So, I wrote, with little chance of bringing new sources of gasoline online anytime soon, “the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.”

That, I predicted, “will become a growing source of agita for investors in oil companies – and other industries.”  Seems I was a tad overconfident.

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THE FED COULD TAKE A LESSON - FROM LEWIS AND CLARK

Guest Writer, August 31 2022

The duo’s historic cross-country expedition began in 1804, when President Thomas Jefferson directed Meriwether Lewis to explore lands west of the Mississippi included in the Louisiana Purchase. 

Lewis chose William Clark as his co-leader for the mission. Their treacherous adventure lasted over two years. 

Along the way, they faced hostile weather, unforgiving terrain, perilous waters, bodily injury, persistent hunger, disease and both friendly and unwelcoming Native Americans. 

Nevertheless, their roughly 8,000-mile trek was deemed a big success and provided new geographic, ecological and cultural information about previously unmapped areas of North America.

It was all about slow and steady.

Fast Forward 400 Years.......

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MANY JOBS WILL BE SACRIFICED AT THE ALTER OF LOWER INFLATION - Invest and Save Accordingly

Guest Writer, September 3 2022

One of the economy’s many enigmas in 2022 has been “blockbuster jobs growth during a time of very low unemployment vs. complaints of a labor shortage,” according to Courtenay Brown and Neil Irwin.

They add that since earlier in the year, it’s seemed like something has had to give. Now, new evidence suggests that "something" may have arrived.

ADP, the nation's largest payroll processor, rolled out its new measure of private-sector payrolls on Wednesday. 

In partnership with Stanford University’s Digital Economy Lab, the ADP Research Institute indicator infers data based on workers added or cut and paychecks sent by its own massive client base.

The other day, it showed private employers added 132,000 jobs in August — less than half from the 270,000 in July, and the lowest reading since January last year. 

The newly designed ADP report aims to capture underlying employment trends compared to its older version that essentially represented little more than a prediction of what the BLS would report two days later.

Well…today’s job report shows that 318,000 jobs were added to private payrolls last month, the lowest gain since April 2021 and well below July's 526,000, but just slightly below economists' estimate of 318,000.

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ARE STOCK AND BOND MARKETS IN MIDST OF A CRASH? - “Big Short” Big Shot Thinks One of Them Is

Guest Writer, September 10 2022

“Big Short” big shot Michael Burry is repeating his warning that the U.S. stock market is in the midst of a major crash.

Burry, who’s famous mainly for his bet against subprime mortgages during the Great Recession, is equating current market conditions to the crashes in 2008 and 2000. 

Burry tweeted yesterday, “Crypto crash. Check. Meme crash. Check. SPAC crash. Check. Inflation. Check. 2000. Check. 2008. Check. 2022. Check.”

The Scion Capital Management chief’s latest pronouncement comes during a period of prolonged pain for especially paper market investors. 

The S&P 500 is down about 18% since January 1st (it hit -24% in mid-June), while the Dow Jones Industrial Average has plummeted about 15% (its 2022 low is -19.8%).

And the techy Nasdaq has fallen about 9% (it’s been as low as -35%) over the same period – all at or into bear territory. 

Popular “meme stocks” have struggled during this virtually all-encompassing downturn. 

Bed Bath & Beyond shares are down more than 51%, AMC shares have plunged nearly 70% and GameStop shares have fallen about 37% this year.

Burry has also called out weakness in SPACS – special purpose acquisition companies – which boomed during the stock market’s surge after its plunge in March 2020 but have cooled considerably over the last year. 

Meanwhile, bitcoin is down more than 60% this year and has dived below $19,000.

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INFLATION EXPECTATIONS SHOW HISTORIC DECLINE - Gold & Silver Building on Last Week’s Mojo

Guest Writer, September 14 2022

There's an encouraging sign that Americans view painfully high inflation as a temporary phenomenon, according to Courtenay Brown and Neil Irwin.

It comes in the form of another sharp drop last month in how steep consumers expect inflation to be in the upcoming years, as shown in the New York Fed's latest Survey of Consumer Expectations.

Expectations for the level of inflation over the next year fell by about half a percentage point in August – a historic monthly decline in the survey's nine-year history and second only to July's record-breaking drop.

Consumers' expectations for year-ahead price increases for gasoline also saw another sharp drop. Now, consumers expect gas prices to be roughly the same a year from now.

The Fed's huge fear is that consumer expectations for steep inflation will become a mainstay of the economy, which could force them to act in ways that would help inflation spiral upward. 

For what it's worth, that worst-case scenario doesn't appear to be materializing.

Respondents also aren't nudging up expectations for higher wages in the future. For the eighth straight month, earnings growth expectations held at 3%.

Even as inflation expectations move in the right direction, the survey shows consumers expect inflation to be much higher than the Fed's 2% target in the years to come.

Economists expect that the CPI – out tomorrow – will show that prices fell by -0.1% in August.

Core inflation – which strips out more volatile food and energy prices – is expected to have risen by 0.3%, matching July’s pace.

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FED TIGHTENING PUSHING HOME SALES DOWN - Is Housing Headed for (or In) a Recession?

Guest Writer, October 5 2022

Pending home sales dropped for the 3rd straight month in August and the 7th drop of 2022.

It’s another sign that the Fed’s campaign to rein in the effects of high inflation appear to be sending a critical industry into recession. https://www.axios.com/2022/09/29/housing-affordability-income-sales-decline

According to the National Association of Realtors, 3 out of the 4 major regions across the country experienced month-over-month decreases in sales (the West saw a minor gain). All 4 regions saw double-digit declines.

The NAR’s Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell 2.0% to 88.4 in August. Year-over-year, pending transactions dwindled by 24.2%. 

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. 

The PHSI is a leading indicator for the housing sector, based on pending sales of existing homes. 

A sale is pending when a contract has been signed, but the transaction has not closed (the sale usually is finalized within one or two months of signing).

According to NAR, pending contracts are considered good early indicators of upcoming sales closings. 

Variations in the length of that process – from pending contract to closed sale – are caused by difficulties with buyers getting a mortgage, home inspection issues, or appraisal issues.

The index is based on a sample that covers about 40% of multiple listing service data each month. 

In developing the model for the index over 20 years ago, it was shown that the level of monthly sales-contract activity matches the level of closed existing-home sales in the following two months.

Coincidentally, the volume of existing-home sales in 2001 fell in the range of 5.0-5.5 million, which is considered normal for the nation’s current population.

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LIONS AND TIGERS AND BRACKET CREEP - Oh My!

Guest Writer, October 12 2022

Emily Peck writes that “inflation adjustments are kind of sexy again.” I’m not sure I agree with that specific characterization, but I definitely get her point.

After decades of underwhelming relevance, cost of living adjustments (aka COLAs) for 2023 will likely be higher than they've been in many years and could actually lower the income taxes many Americans owe in 2023.

As Peck observes, COLAs on certain taxes, social security payments and wages have hardly been noticed since the late 1970s and early 80s.

For example, social security COLAs from 1979-1982 were 9.9%, 14.3%, 11.2% and 7.4%, respectively (an average of 10.7% – reflecting that high CPI).

But they’re critical now, especially for less well-off Americans coping with the effect of the highest inflation in over 40 years.

Take social security again. Over the 20-year period of 2000-2019, the average annual COLA was about 2.2% (including no COLA adjustment in 2010, 2011 and 2016 and a 0.3% increase in 2017).

Granted, not all salaries – particularly in the private sector – are subject to COLAs; those workers have to depend on promotions, bonuses or new, higher-paying jobs at other companies to keep up with rising prices.

And many taxes and deductions aren’t adjusted for inflation at all (the U.S. tax code is a bit of a hodgepodge).

In fact, the Wall St. Journal recently remarked, "These inflation adjustments can hardly be called a silver lining, as Americans are paying more for everything from housing to food and energy.”

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Boom!

Bob Rinear, November 12 2022

So, we talked about two things this past Wednesday, 1) are we looking at a “melt up” into year end and 2) what were we going to get with the CPI.

My feeling was simple. This is what I said:  “So, the median call is for the CPI to come in +7.9%. The question is, what happens if it's higher or lower? If we get a lower reading of say 7.6 this market will rally hard. Maybe it would be short lived, but up we would go. “

Well I missed by a tenth, the report came in at +7.7%. And what happened? The market went nuts. We had the futures trading up 1000 points on the DOW before the open and we put in a 1,200 point DOW day.

Why? The current theory is that inflation has peaked, and this will give the Feds the green light to just do maybe one more 50 basis point hike and then go into pause mode. They thought the concept was just marvelous and they ran with it. Bigly so to speak.

First off let’s get a few things straight. The inflation we’re suffering from wasn’t because of overheated buying by us peon’s. It has TWO root causes. 1) the insane money printing/QE baloney the feds have been hammering us with for 12 years and 2) the insane supply chain disruptions resulting from them unleashing their bioweapon bullshit on us.

The money creation IS the very textbook definition of inflation. You don’t have to be a fellow of Lucasion mathematics to understand that. In fact if you go to dictionary.com and look up the word inflation, this is what you find:

Noun.

Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency

And there you have it. An increase in the volume (amount/printing) resulting in the loss of value of the existing currency. Bingo, give the dictionary a big cigar.

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Powell

Bob Rinear, November 30 2022

Hi all, this letter might be a bit shorter than usual. Our office girl came down sick Sunday night, and now my wife’s a bit under the weather. I’m playing nursemaid.  Anyway…

Last week, the day ahead of Thanksgiving, the minutes from the last fed meeting were released. Now let me set the stage for you all. On Wall Street, when a big holiday is on deck, the senior management usually gets a one or two day jump on things.

They get their Hamptons beach house all ready for guests and frolicking with much food and drink. And yeah, some coke might be found too. The point being that on the day before the true holiday, if the market is open, it’s not being manned by all the heavy hitters. No, they’re in their cozy beach homes, and keeping in touch via internet and phone with the juniors they’ve left to man the stations.

But usually the word given is “don’t rock the boat.” In other words, the major players don’t want the second string guys to do anything stupid and lose them money.  So what usually happens is this…say the market has been trending slightly higher into that holiday. Well, those junior players will figure “hey, the market was inching higher when the bosses were here, we’ll just keep the motion going.”

This became pretty evident to me when those minutes hit. Yes there was talk in them about possibly slowing the “size” of the upcoming rate hikes. Wall Street apparently loves that idea. Why? Well they figure that if they’re no longer needing to stomp on the brake pedal with 75 basis point hikes, then surely that means they’re getting much closer to their target rate and soon they’ll do their pause and stop hiking.

So the report hit and the market which had slumped a bit perked up and ended the day nice and green. Even on Friday with the shortened market session, they eeked out some more gains.

But I didn’t read those minutes like they did. What came blaringly important to me was that most of them agreed that while they might chop down on the size of the hikes, the ultimate rate they think they want is HIGHER than they had previously considered.  That to me was a major warning sign. 

Let’s face it, there’s a decades old adage that says don’t fight the fed. I get it. When they’re cutting rates, you go with the flow and buy equities. When they’re hiking, you tend to sell down some. But here’s where I think they’ve misread the fed. What difference does it make how big each rate hike is, if your end goal is higher than you originally stated?  For instance 2 75 basis point hikes is 1.5%, right? Well isn’t 3 50 basis point hikes the same? It is.

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59 posts with tag inflation online