How long can the Fed whistle past the "There is no inflation" graveyard before raising rates?

David Goldsmith

All Powerful Moderator
Staff member

The Pandemic Is Costing Americans More Money Than Official Numbers Suggest

The COVID-19 pandemic is impacting the way Americans socialize, work and play—and how we spend money. Since March, virus-containment measures like lockdowns, quarantines and social distancing have altered our purchasing behavior, while the supply and demand of consumer goods—and the value they hold—has also changed.
But the U.S. Consumer Price Index (CPI), which tracks prices for a set basket of goods and services and helps policymakers measure household spending and inflation, hasn’t been adjusted for the pandemic—it doesn’t take into account that Americans stopped going to the movies but had started hoarding toilet paper, for instance. The CPI gives more weight to goods that make up a greater share of the typical consumer’s spending, but those weights are only assigned once a year. They were last updated by the Bureau of Labor Statistics (BLS) in Dec. 2019, which, of course, was before the pandemic hit.
What happens if we change the basket to accommodate for our altered spending behavior? To help answer that question, Alberto Cavallo, an associate professor of business administration at Harvard Business School, came up with an alternative “COVID CPI” that accounts for pandemic-era changes in consumer behavior. Using credit and debit-card transaction data, Cavallo found that Americans have been buying more food and alcoholic beverages (giving them more weight in his coronavirus-adjusted calculations), while spending less on transportation and recreation (giving them less weight). Supply disruptions, meanwhile, have also caused the prices of some goods to increase.
All things considered, Cavallo found, household costs have increased more during the pandemic than official figures suggest:

“Ultimately, our ability to buy goods and services depends not just on our wages and incomes, but also on the cost of the goods and services that we buy,” Cavallo explains. “The math is simple: if you get a wage increase of 2%, but prices also rise 2%, you have gained nothing.”
Cavallo’s research, originally published in the summer and updated in October, shows that the divergence in inflation rates was particularly stark in the earliest months of the pandemic. The annual inflation rate in May was 0.13%, according to the official CPI, but 0.95% according to his adjusted COVID-19 CPI. The two values have since moved closer, but are not yet in line. In September, the official CPI had a 1.41% inflation rate, while the COVID-19-adjusted index had a 1.9% rate.
Cavallo’s analysis also indicates that poorer households are feeling the effects of these inflation levels more than richer households (in absolute value, low-income households spend less money per food item, for instance, but they spend more on food as a share of total spending). In May, the annual inflation rate for the bottom fifth of households by income was 1.12%, but only 0.57% for the top fifth—a difference of 0.55 percentage points. In September, the difference was 0.25 percentage points.
These are large gaps for U.S. inflation levels, and they could have a significant cumulative effect if the pandemic persists. Cavallo cautions, however, that because a household’s bottom line reflects both spending and income, it would be necessary to run a separate analysis that factors in wages and unemployment benefits to know for sure if people are actually worse off. That millions of Americans are currently unemployed, for instance, muddles the analytical waters.
The CPI is an important measure of inflation, similar to the Personal Consumption Expenditures Price Index (PCEPI), another key metric that the U.S. Federal Reserve uses to maintain its target inflation rate. (The PCEPI excludes price-volatile food and energy categories, but Cavallo believes that it, too, would show discrepancies if adjusted for pandemic spending.) Knowing that these official indexes do not reflect reality could help guide monetary policy or government economic stimulus programs.
But it’s unlikely that government statistics offices like the BLS will change its index based on Cavallo’s findings. The International Monetary Fund has commented that pandemic-specific adjustments to the index offer a useful perspective, but warns that information on pandemic expenditure patterns is incomplete. Plus, any adjustments would likely be so short lived that they could actually result in less accurate inflation measurements in the longer term.
Even Cavallo himself doesn’t advocate for replacing the current CPI. But he does believe that an alternative index with a more flexible basket of consumer goods offers valuable insight in times of crisis. “No statistic is perfect,” he notes. “And we really need to have a variety of metrics to help policymakers understand what is going on.”
 

David Goldsmith

All Powerful Moderator
Staff member
"It's sure going to look like inflation"

John Malone says he's buying hard assets like housing in bet on currency devaluation
Liberty Media Chairman John Malone told CNBC that hard assets look attractive as the unprecedented coronavirus stimulus is poised to lead to a depreciation in currencies.

"We've survived this [pandemic] because of enormous fiscal and monetary stimulus," Malone said in an interview that aired Thursday with "Squawk on the Street" co-host David Faber. "And I've got to believe this will lead to devaluation of currencies, that hard assets ... will increase in value in currency terms. I'm not sure I'm going to call this inflation, but it'll look like and feel like inflation."

To support the economy through the pandemic, the Federal Reserve slashed interest rates to near zero and vowed to keep buying assets under its quantitative easing measures. Lawmakers passed a historic $2 trillion coronavirus relief deal in March that provided Americans with stimulus checks and other aid measures.

"I think we're seeing it in housing — this unrealistically low interest rate environment, which has been necessary now in order to avoid worse problems," Malone said. "It's hard for me to believe that it won't be followed by a period of currency devaluation."

Malone believes the massive amount of stimulus will lower currency's value, making hard assets such as real estate and commodities more appealing. The DXY US Dollar Currency Index has fallen more than 10% from a March high.

"I've been trying to invest or diversify into hard assets," Malone said. "You know, I think things I bought this last year, I've bought ...substantial interests in ... multifamily housing, primarily in the U.S."

Record low mortgage rates are boosting the demand for homebuying. Sales of newly built homes jumped to the highest level in 14 years in August amid the stay-at-home culture of the coronavirus pandemic.

Malone said he's also getting into assets like farmland.

"I've bought irrigated farms because commodities were cheap and farms were at a low cycle in value. And I'd always wanted to have some irrigated farming, so now I'm growing potatoes," he said.
 

David Goldsmith

All Powerful Moderator
Staff member

The ‘single greatest risk’ facing Americans could hit within a decade, billionaire investor warns​

‘The single greatest risk that we are dealing with today is the loss of the U.S. dollar as the reserve currency. If we keep doing what we are doing right now, I think it is 10 or 15 years away.’
That’s Sam Zell, the founder and chairman of Equity Group Investments, warning in a recent RealVision interview that “a 25% reduction in our standard of living” could take place if the dollar DXY, -0.24% loses its reserve status, which he says is a very real possibility.
“Unlimited debt and irresponsible activity don’t lead to positive outcomes,” the billionaire real-estate mogul added. “That’s a disastrous kind of scenario.”
Zell isn’t the only heavy-hitter concerned about what a crumbling dollar could do to the U. S. economy. Bridgewater’s Ray Dalio recently warned that “we’re very close” to losing that status.

“The system needs to be re-engineered to do this. But if we don’t do this engineering well, we’re going to spend in an unlimited way and deal with that by creating debt that won’t ever be paid back,” Dalio told MarketWatch back in September. “Within the next five years you could see a situation in which foreigners who have been lending money to the United States won’t want to.”
As for Zell, he also shared his thoughts on the current investing climate in comments from the RealVision interview compiled by Business Insider.
“We can look at some parts of the stock market today and say, ‘Everybody is crazy,'” he said, “I look at valuations and see extraordinary numbers that I can’t support.” He pointed specifically to one of the market’s highfliers. “I can’t even begin to give you an intelligent assessment of Tesla TSLA, +2.44%. ”
Then there’s bitcoin BTCUSD, 2.92% and it’s nosebleed ride to record highs.
“I am very skeptical, frankly, of bitcoin.” he said. “Ultimately, it may be the answer or one of the answers. But right now, it’s a world that’s extraordinarily populated by chameleons and other fast-talking characters. I don’t believe everybody involved in it are the kind of people I’d like to follow. ”
Finally, Zell also had a message for those confident that they have a pulse on where the volatile stock market is headed in 2021: “Everybody else seems to have a kind of timing game in their own head. ‘Well, I can get out before so and so happens,'” he said. “The world is full of skeletons of people who believed they could get out before the bad event came.”
Meanwhile, the market continues its volatile ways with the Dow Jones Industrial Average DJIA, +0.23% off triple-digits on Tuesday. The S&P 500 SPX, +0.35% was also in the red, while the Nasdaq Composite COMP, +0.26% turned higher.
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
measuring inflation has always been suspect. We have been experiencing disinflationary forces since the early 80s. It took 40+ years to get to 18Trln in global negative yielding bonds, and who knows whats in store for 2021 which will be the mother of all currency printing years. As the fed and CBs battle deflation, i think the risk of the first inflationary wave in generations is rapidly rising. This decade is gonna be crazy. The fed will attempt to control rates by yield curve control, but they will fail the longer out on the curve you go. I wouldnt be surprised to see a 5% 10yr treasury rate by 2025 and 7% rate by end of this decade. Seems crazy now, but then again, nothing is normal these days.
 

David Goldsmith

All Powerful Moderator
Staff member

Bond Market Smells a Rat: 10-Year Treasury Yield Hit 1.04%, Highest since March. 30-Year 1.81%, Highest since February. Mortgage Rates Jumped​

Seems, inflation prospects jangled some nerves today.

The 10-year Treasury yield jumped 8 basis points today and settled at 1.04%, the highest since the wild panic days in mid-March 2020. As the yield rises, the price of that bond falls. This yield has now exactly doubled from the historic low of 0.52% on August 4, when folks were still betting that the 10-year Treasury yield drop below zero:

The 30-year yield jumped 11 basis points today to 1.81%, the highest since February 26. On March 3, as all heck was breaking loose, the yield had briefly plunged below 1% for the first time ever, and days later it was back at nearly 1.8%, in some wild and volatile panic trading. But this time, the upward trend started on August 4 and has been systematic:

Might the bond market be smelling a rat?

Yes, inflation. The bond market is smelling it. Everyone is smelling it. The Fed is touting its new philosophy of letting inflation run hot for a while – whatever “hot” and “for a while” might mean. The Fed’s inflation measure is “core PCE,” which nearly always runs below “core CPI” which always runs below whatever inflation people are actually experiencing in real life.
The prospects of inflation are further heightened by the possibility of additional big-fat stimulus packages, on top of the big-fat stimulus packages that Congress already passed in 2020. In addition to possibly firing up inflation as this money gets spent — and we have already seen some of this in real life — these stimulus packages need to be funded by debt issuance, putting more upward pressure on yields.
Chicago Fed President Charles Evans, a voting member this year on the FOMC, explained yesterday at a virtual meeting that “frankly if we got 3% inflation that would not be so bad” as long as it is not accelerating uncontrollably.
So, 3% as measured by core PCE. Something like 3.5% to 4%, as measured by core CPI. That would be a hefty dose of inflation for those who bought 10-year securities at a yield of 0.6% in the summer, or even those who bought them at a yield of 1.04% today, or worse, those who bought longer-dated Treasuries, looking at the next two decades.
Inflation destroys the purchasing power of bonds. The yield is supposed to compensate for that risk. But in this scenario, with current Treasury yields, it’s not even close.
And mortgage rates got nervous over the past couple of days. For example, the average jumbo fixed-rate 30-year mortgage rate jumped by 13 basis points today, from near record lows, to 3.25%, according to Mortgage News Daily. Maybe just a blip, but it shows some nerves got jangled.
But clearly, bond markets are only getting a teeny-weeny bit nervous because yields are still extremely low. Left up to its own devices, the Treasury market with these Fed-inspired visions of inflation, might react more strongly. But the Fed is still buying Treasuries and mortgage-backed securities, and that is keeping a lid on the upward moves. And holders of those securities at those yields will just have to eat the inflation.
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member

Bond Market Smells a Rat: 10-Year Treasury Yield Hit 1.04%, Highest since March. 30-Year 1.81%, Highest since February. Mortgage Rates Jumped​

Seems, inflation prospects jangled some nerves today.

The 10-year Treasury yield jumped 8 basis points today and settled at 1.04%, the highest since the wild panic days in mid-March 2020. As the yield rises, the price of that bond falls. This yield has now exactly doubled from the historic low of 0.52% on August 4, when folks were still betting that the 10-year Treasury yield drop below zero:

The 30-year yield jumped 11 basis points today to 1.81%, the highest since February 26. On March 3, as all heck was breaking loose, the yield had briefly plunged below 1% for the first time ever, and days later it was back at nearly 1.8%, in some wild and volatile panic trading. But this time, the upward trend started on August 4 and has been systematic:

Might the bond market be smelling a rat?

Yes, inflation. The bond market is smelling it. Everyone is smelling it. The Fed is touting its new philosophy of letting inflation run hot for a while – whatever “hot” and “for a while” might mean. The Fed’s inflation measure is “core PCE,” which nearly always runs below “core CPI” which always runs below whatever inflation people are actually experiencing in real life.
The prospects of inflation are further heightened by the possibility of additional big-fat stimulus packages, on top of the big-fat stimulus packages that Congress already passed in 2020. In addition to possibly firing up inflation as this money gets spent — and we have already seen some of this in real life — these stimulus packages need to be funded by debt issuance, putting more upward pressure on yields.
Chicago Fed President Charles Evans, a voting member this year on the FOMC, explained yesterday at a virtual meeting that “frankly if we got 3% inflation that would not be so bad” as long as it is not accelerating uncontrollably.
So, 3% as measured by core PCE. Something like 3.5% to 4%, as measured by core CPI. That would be a hefty dose of inflation for those who bought 10-year securities at a yield of 0.6% in the summer, or even those who bought them at a yield of 1.04% today, or worse, those who bought longer-dated Treasuries, looking at the next two decades.
Inflation destroys the purchasing power of bonds. The yield is supposed to compensate for that risk. But in this scenario, with current Treasury yields, it’s not even close.
And mortgage rates got nervous over the past couple of days. For example, the average jumbo fixed-rate 30-year mortgage rate jumped by 13 basis points today, from near record lows, to 3.25%, according to Mortgage News Daily. Maybe just a blip, but it shows some nerves got jangled.
But clearly, bond markets are only getting a teeny-weeny bit nervous because yields are still extremely low. Left up to its own devices, the Treasury market with these Fed-inspired visions of inflation, might react more strongly. But the Fed is still buying Treasuries and mortgage-backed securities, and that is keeping a lid on the upward moves. And holders of those securities at those yields will just have to eat the inflation.
Coming back down now. Let's see what next few months of them new administration does to the dollar
 

David Goldsmith

All Powerful Moderator
Staff member

Higher inflation is coming and it will hit bondholders​

Historic increase in monetary supply to fight Covid crisis will lead to higher consumer prices​


The money created by the Federal Reserve in response to the coronavirus emergency is not just going into excess reserves of the banking system but directly into the bank accounts of individuals and businesses

When oil prices sank to zero last May, few investors thought of inflation. But those who study data on monetary conditions knew that the unprecedented build-up in liquidity would see the economy boom and prices rise as soon as vaccines put an end to the pandemic.
The monetary data are striking. Between March and November, the measure of broad-based money supply, M2, jumped by a sharp 24 per cent. Shockingly, the money supply surge in 2020 exceeded any in the one-and-a-half centuries for which we have data.

{"uid":0.6406667924439662,"hostPeerName":"https://amp-ft-com.cdn.ampproject.org","initialGeometry":"{\"windowCoords_t\":0,\"windowCoords_r\":412,\"windowCoords_b\":734,\"windowCoords_l\":0,\"frameCoords_t\":1335,\"frameCoords_r\":356,\"frameCoords_b\":1585,\"frameCoords_l\":56,\"posCoords_t\":1335,\"posCoords_b\":1585,\"posCoords_r\":356,\"posCoords_l\":56,\"styleZIndex\":\"\",\"allowedExpansion_r\":112,\"allowedExpansion_b\":484,\"allowedExpansion_t\":0,\"allowedExpansion_l\":0,\"yInView\":0,\"xInView\":1}","permissions":"{\"expandByOverlay\":true,\"expandByPush\":true,\"readCookie\":false,\"writeCookie\":false}","metadata":"{\"shared\":{\"sf_ver\":\"1-0-37\",\"ck_on\":1,\"flash_ver\":\"26.0.0\",\"canonical_url\":\"https://www.ft.com/content/6536113f-f509-41e2-bee0-597ed90843b6\",\"amp\":{\"canonical_url\":\"https://www.ft.com/content/6536113f-f509-41e2-bee0-597ed90843b6\"}}}","reportCreativeGeometry":false,"isDifferentSourceWindow":false,"sentinel":"0-922728117732255492","width":300,"height":250,"_context":{"ampcontextVersion":"2101212155000","ampcontextFilepath":"https://3p.ampproject.net/2101212155000/ampcontext-v0.js","sourceUrl":"https://amp.ft.com/content/6536113f-f509-41e2-bee0-597ed90843b6","referrer":"","canonicalUrl":"https://www.ft.com/content/6536113f-f509-41e2-bee0-597ed90843b6","pageViewId":"2531","location":{"href":"https://amp-ft-com.cdn.ampproject.org/c/s/amp.ft.com/content/6536113f-f509-41e2-bee0-597ed90843b6"},"startTime":1611470044133,"tagName":"AMP-AD","mode":{"localDev":false,"development":false,"esm":false,"minified":true,"lite":false,"test":false,"version":"2101212155000","rtvVersion":"012101212155000"},"canary":false,"hidden":false,"initialLayoutRect":{"left":56,"top":1335,"width":300,"height":250},"initialIntersection":{"time":1442.9999999701977,"rootBounds":{"left":0,"top":0,"width":412,"height":734,"bottom":734,"right":412,"x":0,"y":0},"boundingClientRect":{"left":56,"top":1335,"width":300,"height":250,"bottom":1585,"right":356,"x":56,"y":1335},"intersectionRect":{"left":0,"top":0,"width":0,"height":0,"bottom":0,"right":0,"x":0,"y":0},"intersectionRatio":0},"domFingerprint":"2363123148","experimentToggles":{"canary":false,"a4aProfilingRate":false,"adsense-ad-size-optimization":false,"amp-accordion-display-locking":true,"amp-action-macro":true,"amp-story-responsive-units":true,"amp-story-v1":true,"chunked-amp":true,"doubleclickSraExp":false,"doubleclickSraReportExcludedBlock":false,"expand-json-targeting":true,"fix-inconsistent-responsive-height-selection":false,"flexAdSlots":false,"intersect-resources":false,"ios-fixed-no-transfer":false,"pump-early-frame":true,"adsense-ptt-exp":false,"doubleclick-ptt-exp":false,"fie-resources":false,"visibility-trigger-improvements":true},"sentinel":"0-922728117732255492"}}" height="250" width="300" title="3rd party ad content" data-amp-3p-sentinel="0-922728117732255492" allow="sync-xhr " none';"="" frameborder="0" allowfullscreen="" allowtransparency="" scrolling="no" marginwidth="0" marginheight="0" sandbox="allow-top-navigation-by-user-activation allow-popups-to-escape-sandbox allow-forms allow-modals allow-pointer-lock allow-popups allow-same-origin allow-scripts" class="i-amphtml-fill-content" id="google_ads_iframe_1">
Monetary expansion has also been robust in much of the rest of the world, but nowhere nearly as pronounced as in the US. And the new Biden administration will surely provide even more fiscal stimulus.
One of the oldest propositions in economics is that the price level is determined by the demand and supply of money. Simplistic formulations of this proposition are called “The Quantity Theory”. This proposition states that the rate of inflation is equal to the excess of the rate of growth of money over real incomes — although more sophisticated interpretations take into account other variables such as interest rates and inflationary expectations.
But while many investors acknowledged that the huge increase in liquidity in 2020 was being funnelled into the stock market, few investors feared inflation. Most noted that the US Federal Reserve had engaged in significant monetary expansion, known as quantitative easing, following the financial crisis. Despite warnings by many economists then of rising consumer prices, inflation did not follow, and actually declined.
However, there was a fundamental difference between what happened during the financial crisis and what is happening now. The money created by the Fed during the last financial crisis found its way into excess reserves in the banking system. Little of it was lent out to the private sector.
Last year’s surge in US money supply was the largest in the 150 years, annual % change

This happened because, before the Lehman collapse, banks did not hold excess reserves. At that time, reserves paid no interest and prudent reserve management dictated that banks keep the absolute minimum to satisfy reserve requirements. All excess reserves were lent into the money market.
The financial crisis changed all of that. Following the crisis, interest rates collapsed. The Fed started paying interest on reserves, and regulators imposed liquidity requirements that could be satisfied with these reserves. The banks easily absorbed the extra reserves created by the Fed and quantitative easing led to only a modest increase in lending.
But the actions of the Fed and Treasury in response to the Covid-19 crisis are producing a very different outcome. The money created by the Fed is not going only into excess reserves of the banking system. It is going directly into the bank accounts of individuals and firms through the US Paycheck Protection Program, stimulus cheques, and grants to state and local governments.

Recommended​

In the mid-1970s, I was a young assistant professor at the University of Chicago during the final years of professor Milton Friedman’s distinguished career. I remember him telling me that aggressive expansion of the reserve base is a powerful force, and would have saved us from the Great Depression of the 1930s. But if expansion of reserves actually reaches saving and checking accounts of the private sector, such Fed action is many times more powerful.
Those words informed my optimistic forecast last summer as the pandemic deepened. I said that the US was going to experience a strong stock market in 2020 and an extremely inflationary economy in 2021.
I certainly do not expect hyperinflation, or even high single-digit inflation. But I do believe that inflation will run well above the Fed’s 2 per cent target, and will do so for several years.
This is not good for bondholders. The huge demand for Treasuries, which has kept their yields so low, is driven by their strong short-term hedge characteristics — their ability to cushion sharp declines in risk assets.
But this insurance is going to get more and more expensive as higher consumer prices erode the purchasing power of these bonds. It is inevitable that bond rates will rise, and rise far more than now envisioned by the Fed and most forecasters.
The multi-trillion dollar war on Covid-19 was not paid for by higher taxes or bond sales to the public. But there is no such thing as a free lunch. It will be the Treasury bondholder, through rising inflation, who will be paying for the unprecedented fiscal and monetary stimulus over the past year.
 

hallmark1

New member
As a former bond analyst and overall watcher of markets, it's my opinion that purely for financial reasons the Fed cannot allow interest rates to rise, although at some point they will rise regardless of Fed action!

This article I wrote at my company's blog is from July 2020, and since then the numbers have only gotten worse...

'Can U.S. Interest Rates Ever Be Allowed To Rise, I Ask Again Three Years Later?'

'Spoiler Alert: The simple answer is that of course they can in the event of runaway inflation and/or an overheated economy, but in light of $26 trillion in federal debt that will soon rise by at least $1 trillion through additional stimulus (not to mention budget deficits for the foreseeable future), the question is whether the Fed will continue to do whatever it can to keep them low in order to try and keep the United States somewhat solvent?'
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
As a former bond analyst and overall watcher of markets, it's my opinion that purely for financial reasons the Fed cannot allow interest rates to rise, although at some point they will rise regardless of Fed action!

This article I wrote at my company's blog is from July 2020, and since then the numbers have only gotten worse...

'Can U.S. Interest Rates Ever Be Allowed To Rise, I Ask Again Three Years Later?'

'Spoiler Alert: The simple answer is that of course they can in the event of runaway inflation and/or an overheated economy, but in light of $26 trillion in federal debt that will soon rise by at least $1 trillion through additional stimulus (not to mention budget deficits for the foreseeable future), the question is whether the Fed will continue to do whatever it can to keep them low in order to try and keep the United States somewhat solvent?'
Thanks for posting!! Some form of YCC is in our future. I just dont see how the free markets support our funding needs for the forseeable future and should any large entity decide to sell vast holdings for whatever reason, thats another situation the fed will have to deal with. I wouldnt be surprised to see fed balance sheet gop fro 7trl ish today to over 15trln by the end of 2022. The question I always wondered was, how far out can the fed effectively control rates? 10years seems to be the tail end of what they can control

its gonna be crazy town for a while
 

hallmark1

New member
Thanks for posting!! Some form of YCC is in our future. I just dont see how the free markets support our funding needs for the forseeable future and should any large entity decide to sell vast holdings for whatever reason, thats another situation the fed will have to deal with. I wouldnt be surprised to see fed balance sheet gop fro 7trl ish today to over 15trln by the end of 2022. The question I always wondered was, how far out can the fed effectively control rates? 10years seems to be the tail end of what they can control

its gonna be crazy town for a while
I don't even think they control that far out.
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
Top