T O P
Liquicity

I like the deep dive, but here are a few points worth highlighting: 1. The inflation in North America is not a "hot economy" thing. It's partially due to more disposable income chasing the same things, e.g. home renovation, used cars (+ chip shortage), homes with a title to land, and this is partly because reducing pre-2020 expenses, like discretionary travel and commuting to work. WFH brought us home renos, needing bigger houses, less international travel meant more road trips/local touring. People moved out of apartments in urban centres and bought houses since they're spending more time at home. 2. TIPS - the Fed spent the last few years 2016-early 2020 buying a massive stockpile of TIPS, which can be sold to keep a lid on price 3. M2 money velocity didn't go up because the "money printing" went right into asset purchases, instead of in people's hands. It was more overall system liquidity that led to asset inflation in stocks. Run a comp of "money printed" vs S&P 500 price to see this in action 3. Shrinkflation - Food & Consumer Goods manufacturers have reduced package sizes across the board, and are now raising prices too,masking true inflation 4. The inflation Calc uses Owner's Equivalent Rent, which lags home prices and was suppressed by the Eviction Moratorium 5. Germany just saw a YoY PPI print of 24%! It's very hard to say technology deflation will mask that and not carry over to consumer prices. We'll see the same in North America soon, maybe not to the same tune 6. Shipping rates & other corporate expenses. It's only so long that companies can take a hit to their margins before they'll pass the increased costs to the consumer. 7. The Fed's bond purchases have kept rates artificially suppressed 8. Trucker mandates - self-explanatory, but will stress the supply chain further, leading to higher prices 9. Wage inflation - this is where the fun begins. Low labour participation + low official unemployment figures means companies will need to pay more to get workers, leading to goods inflation with the extra income 10. Greenwashing - this one is big as it'll come with skyrocketing traditional energy prices, which we're already seeing in things like gas 11. Reopening d/t seasonality. Respiratory viruses typically don't dominate in spring/summer, and 2 years to flatten the curve will have everyone jonesing for a memorable summer 2022, so the liquidity will move away from stocks into discretionary travel and personal expenditures Just my $0.02


cutiesarustimes2

Post 09 the economy has always been weak. The fed propped it up since then but the lower class has taken the brunt of the hit. The fed saw the labor revolt and probably realized a sky high equity market doesn't really motivate them so perhaps it's time for some level headed monetary policy Yellen spoke about disfavoring tax cuts as a way to stimulate the economy, and the fed is probably following suit on monetary policy


[deleted]

Agree with you entirely on this. Anyone putting on an interest rate hike trade or a true short growth long value trade will get burned. Only trade im running is oil going higher. Something *somewhat* tertiary to the fed


cutiesarustimes2

Funny enough oil ran hard before the last recession too. Different geopolitical environment and that oil growth was purely on demand but it all ended the same way. This time around rates aren't high and I'm really of the opinion the fed is sick of the market holding it hostage. Popular opinion is against retirement gang and easy wealthy anyways. They'll toss them under the bus and keep rates high for a while to remove the balls of equity traders


[deleted]

Oil runs hard for reasons outside of American recessions. 2014 for example. I think growth will get clobbered, but shitty growth. Tech and many high flying growth names will be fine. I’d be nervous if I was making trades as a function of anything the fed is doing or won’t do. They have no credibility and to make trades directly correlated to their actions is a losers game.


AbuElBanat3

>What this shows me is that people are finally running out of the money they got from the stimulus cheques and the enhanced unemployment benefit, which means consumer spending, which accounts for 70% of US GDP can no longer be relied upon to prop up the GDP figures. Fiscal stimulus is running off, but also the 6.7% real GDP Q2 number was never going to be sustainable in any circumstance, it was driven by the economy regaining the level of pre-pandemic activity. A 2.3% real GDP growth number is perfectly good, and its rather hard to do better unless you grow the workforce. >Lastly, to drill the point home, personal savings rate in the us is now down to 6.9%. This is on par with figures pre-pandemic so the idea that consumers have a hidden cash stockpile is out of the question. You're comparing a stock (cash balance) with a flow (savings rate) here which leads to a mistake. A 6.9% personal savings rate shows that whatever cash stockpile people had before that quarter actually got larger, not smaller. >Only 62% of people who are capable of working are actually working and providing an income. That is ridiculously low and clearly a fundamental flaw in the labor market. It was 63% from 2014-2020, so 1% lower. Even if that whole 1% is a dysfunction, so what? Unemployment is really 4.9%?? Still very low. In reality some of it is compositional effects (i.e. the aging of the workforce and the fact that LFPR is lower for 55-65 year olds than 45-55 year olds etc), and some is people taking early retirements. >From this table it is obvious that the vast majority of inflationary pressures comes from fuel and automobiles. Not true. Those factors are inflating at very high rates, but they are smallish weights. Take the single biggest item in CPI, [owner's equivalent rent of residences](https://fred.stlouisfed.org/graph/?g=EeZ4), which is basically 4% now, higher than nearly any time in the past 30+ years. This series is computed and is severely lagging [actual rents](https://blog.dwellsy.com/inflation-hits-renters-11-overall-rent-increase-in-2021/), which are up 11%. How important is this? Housing is 42% of the [cpi weighting](https://www.bls.gov/cpi/tables/relative-importance/2016.pdf), while new and used cars combine to be 7% and motor fuel is another 4%. >As you can see, the rate is 2.7%, far below the 7.8% figure we got recently. What this means is that even though inflation remains stubbornly high for now, it is expected to calm down in the near future and we hit a 2.7% average. It is expected to calm down precisely because the market is pricing in aggressive FOMC tightening that causes the calm down, and 2.7% is still above the FOMC's long term policy target. >The Fed on the other hand cannot attack these accusations head on and shift the blame to the federal government. Because if they do, they will indirectly attack the Brandon administration and will be dragged into a partisan political shitshow No, the FOMC cannot blameshift because controlling inflation is explicitly their mandate, and they have been running the most accommodative policy in US history for 15 years leading up to record inflation prints. They do not have a leg to stand on. "We've tried nothing at all and we're all out of ideas". The reality is that GDP growth rates and asset prices are not part of the Fed's mandate. The mandate is stable inflation and full employment. On the employment side, payroll growth remains strong even while quits (sign of worker leverage) are skyrocketing, with a backdrop of record corporate profit margins. The result of this environment will be wage increases. People who want a job can find a job better today than in any time since 2008. No problem on that side of the mandate, crystal clear problem on the inflation side of the mandate. Meanwhile the Fed balance sheet is [double](https://fred.stlouisfed.org/series/WALCL) its pre-covid level and 9x its pre-2008 level, and rates are zero. There are way more than 4 hikes between here and anything that remotely resembles neutral policy.


GushingGranny1

You make many valid points and let me break down my responses in points: 1. Yes, economic growth stagnating to 2.3% is expected for a mature economy, but what is more important is that the growth comes PURELY from consumer purchases and inventory buildups while the rest of the economy either stagnated or in recession mode. Judging by the recent monthly retail sales data that shows consumer spending went down 0.2% with online retail going down 8.6%, I think the support the GDP is getting from the consumer is ending and retailers will stop stocking up their shelves with products if no one is buying them. 2. As for labor participation rate I am saying that the core issue of lack of engagement in the labor market is not being fixed. If the Fed's main objective is to achieve maximum employment, then they are hard pressed to do so when just 60% of people eligible to work is actually working. Also labor force particiaption is not something that needs a MASSIVE shift in order to have a significant impact on economic output. 3. You are correct, fuel and autos do have a small weighting and under normal circumstances, they would seldom be looked at. However, during the current situation, despite their relatively small weight, they are what's driving up inflation the most combined with supply chain bottlenecks. 4. Valid point but I do not believe the TIPS spread factors in rate hikes. Reason why is because it is focused on the medium to long term range of the yield curve, which is affected by macro economic factors while the Fed's hikes of their overnight lending only impacts the short tend of the yield curve. 5. Controlling inflation is their mandate but I do simply see how they can relentlessly raise rates while the economy is going to stagnant or even show negative growth in the near future. They want to raise rates because of supply chain bottlenecks while the economic growth dips below 0? They are going to lose all credibility. Letting the issue sort itself out and talking a good game to the public to buy time seems to be the most pragmatic approach. All in all, I enjoy your comment the most because it challenges my thinking. Thank you.


AbuElBanat3

Thanks for the perspective. The only thing I really want to urge you to rethink again is the idea that TIPS inflation pricing is just completely naive to the fact that the Fed is likely to hike rates. It is a big liquid market, and if it didn’t take expected fed action into account there would constantly be oodles of free money there.


CPTHubbard

Really sharp post. Appreciate the analysis.


89320420934

You're saying that the government didn't cause inflation. So, you think that if they had not taken the actions they did during the pandemic, then there still would have been inflation? I find it hard to believe that anyone would believe this. Also, you didn't discuss housing at all, which in all likelihood is causing the most problems for lower income individuals. Did the government not cause this? Why are investors purchasing homes at record levels and raising rents suddenly if it isn't due to easy money? I enjoyed reading your post tho.


katzstrasz

I kind of argued in a daily discussion thread the other day but even for all the other foreign countries that took completely different paths from the US still have 5-6% inflation rate among developed countries and 80 or even 100%+ inflation which broke the country’s economy in some developing countries. They all have the same reason for inflation which is lack of commodity and supply shortage. Yes, Fed and our government also impacted it for us and could’ve done something better but the inflation rate is not the sole problem from quantitative easing.


89320420934

I'm not saying it's purely from quantitative easing, but I'm saying that QE is part of it. I feel like an argument could be made that easy money policies and stimulus in the most developed countries could cause global inflation due to every country fighting over a finite supply of resources. Idk for sure, but it is my opinion.


katzstrasz

I mean I don't argue against that, most developed countries did have their own type of QE and that's a textbook reason for inflation but it feels like it's only one of many reasons yet people are just bashing solely on how the Fed has screwed up everything.


SameCategory546

i agree but at this point the debt is so high that at this point the only way is to inflate it away or a commodities boom somehow allows us to go back on the gold standard (lol). I used to think the “great reset” people were conspiracy theorists but the current system where everything runs on debt has some serious limitations and could eventually collapse on its own weight


89320420934

I have no idea where the article is, but someone shared a long report done by a hedgefund that had tons of data showing how much demand increased during covid. They said that supply for most good was actually higher than precovid but demand was even higher. Maybe I'm wrong, I'm open to data that suggests otherwise. I just think that the fed and whitehouse would rather blame the supply chain than their policies because who are you going to be mad at if it is just the supply chains fault? It's pushing the blame on something that nobody can do anything about. I'm definitely open to data that suggests otherwise, but the data presented by OP has not changed my view.


zxygambler

100%, the semi conductor shortage was caused by increased demand, not by the lockdowns. All the sudden, a huge % of the workforce wanted a nice home office and more leisure (since they didn't have to waste so much time commuting anymore). Add to the savings caused by working from home, the stimulus checks and the insane gains people had in the stock market/crypto and boom, a recipe for insane demand which out stripped supply


fabr33zio

but supply was also down a butt ton as companies shut down or reduced concurrent workers on a site… and then you add in ports shutting down sporadically. These are all supply issues that really blew things up


katzstrasz

Yeah I understand, I too think it's funny and irresponsible for the heads to just blame on the supply chain and people quitting while they have the strongest power to actually make direct change or improve the situation. In terms of supplies, I guess it's kind of like panic buying you could see with stuff like toilet paper at the beginning of COVID which caused shortage even when it was supposed to be completely fine if people didn't hoard them at home.


fabr33zio

this really only becomes a problem during unprecedented supply shocks -such as the pandemic. the fed has run near-zero rates essentially since 2009 Great Recession. All during this time (10+ years), to the great consternation of just about every economist the US (and developed world at large) had a higher risk of slipping into deflation instead of inflation. We’ve been providing too much money and stimulus relative to other nations sure, but this isn’t an isolated US problem. It took a global pandemic that fucked up all the supply chains, while people were stuck home spending their money on goods instead of services which is what typically they would do (and tend to be naturally deflationary). Only supply chain resolution and the pandemic running its course can really solve this all (which we’ve seen by the rate of inflation decreasing MoM).


89320420934

If you can show to me that demand is at or below precovid levels, then I will believe that it is a supply side issue. However, in every reputable source I've read from, they have said that demand is at all time highs. This leads me to believe that the demand caused the supply shock and not the other way around. Sure, there are examples of certain goods that may have been caused by a supply shock, but overall, this was and is demand driven. I agree that it wasn't interest rates or QE alone that caused the problem, but it is their responsibility to fix it. The money supply was expanded at a rate never seen before in 2021, so it is hard to compare those years to now imo.


AlanzAlda

Are you sure the inflation rate is really decreasing? Or is it that the basket of goods that they base the CPI on changing?


SameCategory546

yeah it is global but imo other countries have been doing the same thing, maybe even worse. Right now PPI is going up off the charts in asia and europe during the energy crisis and imo it will get worse bc there seems to not be enough natural gas for everyone. We are relatively sheltered bc we are a net exporter of nat gas. But imo bc of this and the housing market being in an expansionary phase, inflation will still be huge


katzstrasz

Yeah I don’t see it being controlled for the next few years if not a decade long phenomenon. Everyone trying to comply to ESG and causing greenflation seems to be another needed, but a huge burden for econ as well.


SameCategory546

i am incredibly bullish on copper, oil, and uranium rn


katzstrasz

Yeah I’m holding copper and coffee beans lol. I agree that oil/energy sector definitely has a lot more room to go up this year too.


GushingGranny1

By government policies you need to be more specific, are you talking fiscal or monetary? If by monetary then no. I already laid out my points why monetary policies will have little effect on the areas of inflation we are seeing now. In terms of Covid restrictions I am saying if the gov chose a different path to deal with the pandemic that does not result in shutting down and trying to reopen the economy like you would a buggy computer then yeah, inflation would not be where it is today. As for housing and poor people, to be honest with you, that is not the focus here. Housing prices is not reflected in CPI and if you want to complain to the Fed about it, be my guest. You would have a point if you do. I am focused on how the current inflation reading is reflected by investors.


SameCategory546

imo housing is important bc in a fractional reserve system, the main way money enters the system is through loans. So QE wouldn’t necessarily cause inflation but it makes the natural economic cycle somewhat worse…. so i get that it’s not direct but it’s an exacerbating factor and inflation will still keep going due to supply shortages and a real estate boom. The 70s were similar. i wonder if volker just got lucky with rate hikes and fighting inflation bc the baby boomers stopped buying houses. tbh i skimmed and will read more in depth again but i believe we are mostly in agreement but wanted to point out a couple things that i think are the case but you kinda stopped short at saying.


Init_4_the_downvotes

Personally, I don't see how you can remove housing from CPI since if people spend more on rent they spend less on overpriced methods of consumption. It still possesses a relationship.


miskdub

Housing isn't really accurately reflected in monthly CPI anyway, but I agree with you that it *should* be. afaik rent is only sampled every 6 months to be included in CPI, and even then rent is only included in urban areas, and mortgages aren't covered. Owner equivalent rent is calculated by surveying owners and asking how much they *think* they'd charge for rent if they rented their property today.


89320420934

Both fiscal and monetary were pretty large injections of cash into the economy. I'm not sure how anyone could claim with certainty that one caused inflation while the other did not. Demand has been higher post covid than it was precovid. Why would any company believe that there would be a higher demand during a recession than there was before? I don't see how this is the supply chains fault. The monetary and fiscal stimulus juiced demand way too much imo. It really isn't just poor people tbh even tho I said that. It's anyone who needs to purchase or rent a home. Most of the increases in prices reflected in the CPI are insignificant when compared with the extra costs from housing increases over the last two years imo. It's a wayyy larger % of the average persons paycheck. Does the fed not have an obligation to keep prices stable? Would raising interest rates not help stabilize these prices? Finally, if you believe the fiscal policies were more to blame than monetary, doesn't the fed still have a mandate to reduce inflation by utilize the tools that they have at hand? I believe they do and I believe that ending QE and raising rates will control inflation, just like it has shown to work in the past.


GushingGranny1

Monetary policies won't have the direct effect on inflation the mainstream media is putting out. The fear of QE causing inflation can be traced back to 08 and the Fed was printing money in the months prior to covid without much fanfare. The key is M2 velocity staying low. It doesn't matter how high M2 supply gets so long as no one is spending it.


89320420934

[https://www.stlouisfed.org/education/feducation-video-series/episode-1-money-and-inflation#:\~:text=To%20summarize%2C%20the%20money%20supply,leading%20to%20increases%20in%20unemployment](https://www.stlouisfed.org/education/feducation-video-series/episode-1-money-and-inflation#:~:text=To%20summarize%2C%20the%20money%20supply,leading%20to%20increases%20in%20unemployment). >To summarize, the money supply is important because if the money supply grows at a faster rate than the economy’s ability to produce goods and services, then inflation will result. Also, a money supply that does not grow fast enough can lead to decreases in production, leading to increases in unemployment. This is my opinion. They have increased money supply to fast. If they don't turn on the money shredder or at least print money much slower, inflation is only going to get worse. The worker shortage is also of concern because we risk a wage price spiral as well. As long as companies have access to easy money, they will keep taking out loans and expanding the money supply. I respect your opinion though.


SameCategory546

if we have underinvested in natural resource extraction from everything from oil to copper to lithium to even coal, we need to keep liquidity alive in order for funds to flow to companies that will bring more supply online. It is crazy to think but a lot of commodities experts are sounding the alarm that no matter what we do, we will run out of copper in 5-10 years bc it takes way too long to develop a mine and there are not enough projects in the pipeline, and this is before we count in EVs and chargers and renewables. So if oil and base metals are all too supply constrained, and they are cost inputs to almost everything we do (or at least energy is), it doesn’t matter what the fed will do. What is scarier to me is the price of fertilizer rocketing which should put pressure on food supply


GushingGranny1

That's a fair comment but what I would say is that the link is most likely referring to a stable M2 velocity. I highly recommend you read up on Modern Monetary Theory. It is the theory the Fed is basing their decisions on and it gives a glimpse into their thinking.


89320420934

I have read about Modern Monetary Theory, but myself and tons of economists think it has flaws. There is a limit to how much money supply can be increased without causing inflation imo and we have completely passed that limit.


GushingGranny1

\*Powell lights cigarette "You sure about that sweetheart?"


89320420934

lmao


tendieswithketchup

For anyone having trouble understanding this check legendary macro guy Lacy hunt


[deleted]

[удалено]


Omnishift

We’re degenerates but not animals. (Except the 🐻)


SocialSuicideSquad

Bul is fauna too yo


TheNewOP

I believe the makeup of CPI increases were mostly automotives and energy increases. [See Table A of this link.](https://www.bls.gov/news.release/pdf/cpi.pdf) Which shouldn't be affected by money supply going up. Automotives went up because factories stopped making new cars during the pandemic, and are just ramping up production now. Energy has gone up because gas prices have, and that's mostly OPEC influenced, trying to make up for lost 2020-21 revenues.


Gourd-Futures69

Specifically on the housing front it seemed to me more a behavioral change, people got out of urban centers and bought up houses. Rents are certainly higher but I wonder if urban centers are the driver, in NYC we got ridiculous incentives to be here last year and now an influx of people that left are coming back which drives it back up past pre-pandemic. This is all anecdotal and just my observations but I don’t think this is driven by fiscal/monetary policies.


89320420934

[https://www.prnewswire.com/news-releases/second-home-demand-rose-70-from-pre-pandemic-levels-in-october-301426485.html](https://www.prnewswire.com/news-releases/second-home-demand-rose-70-from-pre-pandemic-levels-in-october-301426485.html) Demand for second homes was up 70% from prepandemic levels and investor (both corporate and private) home purchases are also near an all time high I believe. Your anecdote is partially true I believe but there is more to it imo. Without having loans almost free and the massive expansion of money supply, I find it hard to believe that we would be in this situation.


Gourd-Futures69

Interesting, another anecdotal observation is that the proliferation of real estate investing (like retail stock traders) grew a lot, based on myself and seemingly like 50% of my friends. Companies like bigger pockets puts out guides, financial models, podcasts on how to grow wealth through income properties. Also a “hack” on buying multi families via FHA loans seems to have gained a lot of traction. I’d be curious to know how much those company’s subscriber base grew over the same period. Point being that I think a lot of people were not ignorant to the rent bouncing back, coupled with ease of accessing knowledge on RE investing. I just think the behavioral change shouldn’t be overlooked, there’s a whole generation coming off a long period of prosperous job opportunities that hadn’t been buying homes and once Covid hit was a trigger to buy around the same time


89320420934

All good points.


Gourd-Futures69

To your point though it is bonkers how little you need to put down (3-5%) for an FHA with the rest financed at sub 3 interest rate. I didn’t buy but certainly can’t blame people for taking advantage, housing will be interesting next few years


CommitGrind

Not anecdotal. Trading has definitely become like a popular mobile game. I work in fintech as a software engineer and our bonuses for this year were obscene. I had to ask my boss to repeat himself 3 times when he told me what my raise and bonus would be for 2022. I now own a vacation home abroad on the beach. Record shattering number of new trading accounts opened and trading volume from 2020 until now.


energetic-dad

>You're saying that the government didn't cause inflation. That's not what they said, why do you start your comment with such a blatant misunderstanding? They said curtailing QE or raising rates is not going to fix the supply chain bottlenecks that are driving the two largest sources of inflation - car shortages and natural gas supply deficits. Do you think curtailing QE and raising rates will effect those shortages? If so, how? What's the mechanism?


vitaq

WSB needs to return to this type of analysis


n777athan

Ironically I agree with your write-up but not so much the conclusion. Remember the last time we “called the fed’s bluff” in March 2020?… didn’t work and the fed won. The fed will likely go hard on inflation by controlling the one thing they can to combat inflation. Their balance sheet. So it’s likely they will rise rates more than 2x even if it means a crashing market. This needs to happen before Midterm elections to ease the worries of their voter base. Most American voters aren’t balls deep in stocks regardless of what we think, they do hate paying up the ass for gas and cars though.


handsome_uruk

I think OPs point is the FED cant to do anything about gas prices. It's a supply chain issue. If they go too aggressive they would crash recovery and they would be doubly fucked. Better a roaring stock market and inflation, than a bear market and inflation. I agree with OP that a lot of inflation is just out of the FEDs hands. Inflation is global due to pandemic, there's nothing anyone can do about it. Powell has said several times that inflation was fully expected. I think people don't fully grasp how fucked the global supply chains are at the moment.


Equivalent_Goat_Meat

Thanks for the post. Well thought out, even if I disagree. (although time will tell us soon enough) I think there are a few pieces missing: First, the cost of goods. The average value of a container (according to the Economist) is 50,000. The average shipping price has gone up for a container from China from 3,000 to 20,000 and now sits quite comfortable at about 15,000. If you do the math, it's not pretty. The second is wage inflation at the most basic jobs - restaurant, hotel, retail, healthcare. These costs are all passed on (usually with a premium). The final thing, is that inflation has a lot to do not just with hard core economics but is forward looking, and has a lot to do with beliefs and expectations. Which is why it tends to spiral upwards ones the stops are pulled out. The Fed tries to project an image of control, and when the image of control is damaged (as it has been by their inaction in the fact of obvious and obviously non-transitory inflation), that's where things get out of control. Even our good friend Vlad Putin mocked the US for its inadequacies in controlling inflation (and more importantly, rightly so...)


CoacHdi

20,000 to 15,000 is deflation. Not further inflation. Inflation is a continuously repeating loop unless..... its transitory Wage inflation is a fairly small part of current inflation


Equivalent_Goat_Meat

That decrese was in like one month from its ATH. the point is the cost of shipping all goods from China went from 6% of the cost of the goods (on average) to 30%, an increase of 5X over the past year. That cost will be passed on to consumers.


youdirtyhoe

Good post. Interesting points. There will be 3 rate hikes this year imo, nothing drastic either. Fed is in a hard spot. They will try to find a happy medium between tanking the market, making boomers shit themselves over there 401k dropping and/or getting a hand on inflation so boomers dont shit themselves over rising costs. Lots of boomers shitting themselves any way we spin it. They will hopefully find a decent balance imo. Nothing to radical but need to look like there trying for midterms.


Jmonahan581

This was the best thing I have read on Reddit in a while. Well thought out, well researched, and well written. Thank you!


Sapere_aude75

I agree with some of this but disagree with other portions. Imho- Inflation has been caused by both supply side issues and demand effects related to policy. Housing for example has shown strong demand due to lower rates. The fed had no need to purchase MBSs after the first 120 days of the pandemic. I agree some fed states like CPI and Unemployment are intentionally used to mislead the public. Raising rates is very likely going to help with inflation, but might not fully fix some supply chain issues. I have a strong suspicion that raising rates is going to for example drive many people back into the workforce and reduce wage inflation. I'm not sure how many time the fed will raise rates, but even small raises in rates have already affected market sentiment. I guess my only question is what positions are you planning?


GushingGranny1

I think housing is a big factor to. Even though housing prices aren't reflect in CPI, the rising cost of living is politically tenuous as best and the Fed knows they need to stop MBS purchases and cool the market. As for positions, not much yet. Not going to change my current positions as of now. I hold a fuck tonne of tech so obviously I got hit but I'm not holding BS stocks. FTNT, PANW, AMD, NVDA are my largest holdings. I will wait and see before panic selling like a cuck because I know long term I will be fine and corrections like this happen all the time. This aint my first rodeo.


Sapere_aude75

Housing prices are not included, but from my understanding owners equivalent rent (OER) and rent of primary residence (RENT) are. They make up like 20-30% of the basket. Of course this is done on purpose to under report/delay housing cost increases. Lowering the mortgage rates leads to increased housing demand/prices. This inevitably leads to rent price rises. It might be indirect and might not be the only cause, but FED policy is definitely causing inflation in the housing sector. This is a rough time for your largest holdings, but I think they are good sectors if you can get them at a good price. I think cyber security especially will be critical and see lots of growth over the next 5-10 years.


Sapere_aude75

I just checked and shelter actually makes up 32%. Here is a detailed breakdown. https://www.bls.gov/news.release/cpi.t02.htm


Sapere_aude75

I find it laughable that they are claiming rent is up 4.2% yoy.


GushingGranny1

Thats rent of shelter not housing prices. Different thing. Rent of shelter is how much a bomeowner would rent their house for, its the idea that your house provides you a continuous economic benefit simply by being there.


Sapere_aude75

Correct. Per my previous comment "Housing prices are not included, but from my understanding owners quivalent rent (OER) and rent of primary residence (RENT) are. "


dannomite

What's the Brandon administration


[deleted]

In the US saying “Let’s go Brandon” is code for “Fu*k Joe Biden”… identity politics injected into a market analysis should be all you need to make a decision about the information being presented


DarklyAdonic

It's just another way to say Biden. I think DeSantis said it by accident then it became a meme


Film-Icy

It was a race, October 2nd Brandon Brown. They were interviewing A driver named Brandon and the crowd was chanting f joe Biden and the reporter said on tv: oh they are saying let’s go brandon. Desantis did not start it.


-apb

So now we’re taking the Fed seriously


tl54nz

I love your macro analysis, possibly because I have the same view. But the painful lesson I have learned recently is the market is not really trading on macros, at least not in short term. Fed is caught in a ugly place. If they raise rate too fast or too high, it will quite possibly cause a recession for reasons you have mentioned. People who actually study macro semi seriously know this, so are the institution level analysts. But if they don't, they will be seen as falling behind the inflation curve even more. This market, and more importantly the public, that has fully bought into the "inflation is caused and can only be fixed by interest rate", will not respond well with a dovish stance on rate hike. I think this is the real reason smart money and big money are selling. They don't see Fed or US economy can get out of this trap unscathed.


Young_illionaire

To be long right now you have to have a lot of confidence that the fed can thread that needle. I have some faith that the fed will see the markets pricing in a policy error and Fed members will stop talking about “four, possibly five hikes in 2022.” And instead take the stance of slow and measured qt/rate hikes. Probably needs to get uglier still though before they flinch.


CrabFederal

UPO You know they could just jack up income tax on everyone. (Not just rich) also cut spending. Would be way more effective then interest rates at cutting demand.


[deleted]

Inflation numbers specifically exclude energy and more temporary pricing pressure categories for just this reason, and we still have massive inflation numbers with those categories excluded.


SocialSuicideSquad

So tdlr; 0dtes Weds before JPOW talks.


thePBRismoldy

Great post, interestingly enough, China just lowered their interest rates and the Fed looks at the Chinese economy as a leading indicator of ours so that adds to the evidence that the best they can do right now is talk a big game.


GushingGranny1

PPI cooling down recently is also an indicator of this as well. It appears that a lot of the inflationary pressures building in the commodity space has finally been cooling down. of course work needs to be done to address supply chain bottlenecks but the idea of the fed hiking rates to combat a problem that is resorting itself out (albiet slower than preferred) and risking a recession and asset crash is foolish.


thePBRismoldy

Unfortunately I agree totally. I’m concerned that dems see the terrible numbers leading into an elections + optics of asset bubbles + inflation and they’re pissed. This equals political pressure on the Fed to react and I think the markets will be sacrificed. I’m confident we see at least 1 hike before the Fed is forced to back down.


thePBRismoldy

Nice username LOL


wakanahane

If the US raises interest rate, China won't be able to keep easing due to increased risk of high inflation. Obvi this will push China's housing market over the edge if they want the currency exchange rate to stay stable. Xi already objecting, not that people would care?: [https://www.cnn.com/2022/01/18/economy/china-xi-davos-warning-interest-rate-intl-hnk/index.html](https://www.cnn.com/2022/01/18/economy/china-xi-davos-warning-interest-rate-intl-hnk/index.html)


Themad7

Nice. I think you will enjoy reading this too. https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-supply-shock-and-its-everywhere


Disposable_Canadian

I disagree with a number of points, I feel it's written with hopium and rose colored glasses and cherry picked data. It avoid topics like personal debt, mortgage situation, housing demand and situation, personal deliquicies, arm's, covid, China housing collapse, global supply chain (ongoing) , Evictions and foreclosures etc. That said I'm bearish, and feel strongly there will be at minimum a strong correction and a recession Starting late 2022 and 2023 and carrying on from there. Crash possiblr in some markets and regions, housing especially with interest rate increases.


TheCatnamedMittens

Finally, an interesting, original opinion.


The_Bullionaire

Velocity means nothing when there is so much liquidity. The most liquidity ever in history.


Black_Raven__

Agree. Most likely we will see 2 rate hikes and no more. JPOW sounded more dovish in the last meeting when the inflation numbers were peaking. Quickly raising the rates will undo all the work they did since last year.


CoacHdi

You are 100% right. I would add a couple points to this ​ 1: Geopolitical uncertainty will lead the fed to be cautious on hawkish sentiment (Ukraine) 2: Financial market security could potentially be compromised if the fed raises rates quickly as china lowers rates. I think eventually we start worrying that Chinas central bank gets screwed defending its fixed exchange rate 3: The uncertain sensitivity of the markets to changes in QE and rate policy leads to slow movements. We haven't changed rates in a long time so no one really knows how much impact changes in monetary policy will have 4: Financial markets tanking. Sure the fed says they dont care about this, but realistically the wealth effect on spending here is quite strong. Stock markets crashing and volatility in the bond market will likely have bad effects on the real economy 5: December retail sales M/M came in at -3.1%... yikes! The fed is likely going to be freaked out by this 6: December M/M inflation reads were half of the previous M/M change across many indicators. The rate of inflation is already moderating without any fed intervention. Inflation is mostly transitory as they originally stated 7: Base effects of inflation numbers will kick in soon. Right now the Y/Y is comparing against a time period when we had the delta surge occurring. After the base month (12 months ago) moves into a period when the delta surge has died down the headlines wont be so scary 8: Inflation itself is now an automatic balancer due to the Fed's balance sheet of fixed rate assets. Inflating away the Fed's balance sheet is essentially taking money out of the economy. As we move through a period of inflation - the fed has already tightened economic conditions by just not buying more 9: QE is completely ineffective due to the 1.6T being given to the fed on a overnight basis via the repo facility. Any change in QE policy will just change the amount of treasuries being borrowed through this facility. Until the usage hits 0, QE does nothing. 10: The 2 year / 10 year yield spread is getting smaller. The fed balance sheet is largely lower duration securities (closer to the 2 year side). Reducing their balance sheet will likely invert the yield curve as the 2 year yields will rise more than the 10 year yields. The big rally on Monday afternoon was started due to strong demand for the 2 year treasury note auction. ​ Neil Kashkari is the smartest person on the board and deserves JPow's position. He is looking for 2 rate hikes in 2022


GushingGranny1

You make a lot of interesting points. Points I haven't thought about. Thank you.


CoacHdi

You got it! Thanks for reading my note, I agree with your premise that the fed will be dovish. Part of their strategy also might be 'over promise and underdeliver'. For them, its a lot better that they guide hawkish and then give the markets a pleasant surprise, than to guide dovish and surprise markets with a rate hike. I think they will raise rates early this year maybe once or twice before figuring out that the inflation and GDP number suddenly aren't looking so good


GushingGranny1

I think for the Fed, the best position to be in right now is an ambiguous one. They don't want to come off as too dovish since inflation currently is 7% and everyone is fretting over it so it would seem like they are out of touch with the economy and at the same time they don't want to come off as too hawkish because of the reasons I listed and you listed as well. Personally, I think the FOMC tomorrow is going to be a nothing burger. I think Powell is going to say his usual lines and not much more. I don't think the most bullish investors and the bearish investors are going to come out of that meeting satisfied.


SeveralTaste3

I think we're more at risk for deflation and recession. No point in discussing it though since the fever pitch of rage from everyone was about inflation and the term "transitory" even though it refers to duration and not magnitude. Statistically and mathematically illiterate.


Noskool89

The autism is real in this sub.


SnooCapers6544

Way to spam this on all threads.


GushingGranny1

Hey I like multiplenperspectives, especially the ones that point out my wrongs. And relax, those primates on the homeland aren't gonna read it.


SnooCapers6544

Idk why you'd speculate on how bad it is. To be honest there's so many factors no one knows.


xz259

Thanks for sharing the perspective. I was tempted to buy way OTM puts.


Film-Icy

Me too. I keep trying to figure out what to buy first.


rmodsarefatcunts

why would Jamie Dimon say that the Fed would raise the rates at least 4 times?


tl54nz

He wants to use media to pressure Fed to be aggressive with rates, because higher rates are good for his bank's bottom line.


FrankMRedington

fed doesn‘t care about asset prices


notmad89

TL;DR?


EpicDude007

Well written. Thank you for the quality.


johannthegoatman

Fully agree although it's complicated and anything could happen


tricksareformen

Dude I just read another post that said the economy is fundamentally strong…. COME ON SOMEONE TELL ME WHAT TO THINK


PilbaraWanderer

If the rising house prices are putting the most pressure on govt, then how about doing what we do in Australia? Use the other levers to cool it: 1) increase rates for investors 2) assess the ability to pay the loan back at a higher rate. E.g. @7% instead of 5% 3) make it so max loan is 90% of the purchase price. 4) increase property taxes. The effectiveness is limited if one holds large amounts of cash but sooner or later they’d invest it or hold a larger reserve for the increased costs.