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

David Goldsmith

All Powerful Moderator
Staff member

Home construction sees biggest drop since pandemic hit. Here's why

Single-family housing starts dropped more than 13% in April compared with March, according to the U.S. Census.
Prices for new and existing homes are at record levels, and the increases are accelerating at the fastest clip in over 15 years.
Roughly 15% of builders said they are putting down concrete foundations and then holding off on framing the house.

Despite a historic shortage of homes for sale, homebuilders are actually slowing production, handcuffed by skyrocketing commodity prices and shortages of land and skilled labor.

Single-family housing starts dropped more than 13% in April compared with March, the U.S. Census reported Tuesday. That's the sharpest decrease since last April, when the pandemic shut down the economy.

"I have to blame the difficulty in procuring lumber and other products, along with labor issues for the miss, in addition to likely cancellations due to skyrocketing costs for single family starts," said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Prices new and existing homes are at record levels, and the increases are accelerating at the fastest clip in over 15 years. Nearly half of all builders say they are adding escalation clauses to their sale prices because of rising material costs, according to a recent survey from the National Association of Home Builders.

"Escalation clauses specify that if building materials increase, by a certain percentage for example, the customer would be responsible for paying the higher cost. Including such a clause allows all parties to be on notice that the contract costs could change if materials prices change due to supply constraints outside the builder's control," according to a recent NAHB post.

In a monthly sentiment survey, they also noted that builders said they were slowing production in order to deal with higher costs for lumber, steel, gypsum and copper, some of which have hit record highs this year. A broad mix of residential construction materials is up in aggregate 12.4% over the previous 12 months, according to the producer price index. The NAHB estimates that the increase in lumber alone has added $36,000 to the cost of building the average single-family home.

The industry is also dealing with a shortage of labor. Construction employment stalled in April and fell below it's pre-pandemic peak, according to the Bureau of Labor Statistics.

"Contractors are experiencing unprecedented intensity and range of cost increases, supply-chain disruptions, and worker shortages that have kept firms from increasing their workforces," said Ken Simonson, chief economist with Associated General Contractors of America, an industry trade group. "These challenges will make it difficult for contractors to rebound as the pandemic appears to wane."

Roughly 15% of builders said they are putting down concrete foundations and then holding off on framing the house. This counts officially as a "start" according to the Census monthly figures, but it doesn't create a house.

Supply-chain issues are also filtering down into all the things that go into a home.

"Builders are also reporting difficulty obtaining other inputs like appliances," said Mike Fratantoni, chief economist for the Mortgage Bankers Association. "These supply-chain constraints are holding back a housing market that should otherwise be picking up speed, given the strong demand for buying fueled by an improving job market and low mortgage rates."

David Goldsmith

All Powerful Moderator
Staff member
It seems to me that for some time ECB rates have been lower than US and I wonder what happens to flow of money if that flips?

Markets Fret the Fed Is Making a Big Mistake​

U.S. central bankers appear unconcerned by conditions that increasingly argue for a tempering of their extremely easy monetary policy. Markets are rightly worried.

A once-unthinkable notion is becoming possible: The European Central Bank may start talking about ratcheting back easy-money policies before the Federal Reserve does. Even more curious is that this would not be the result of the usual policy drivers relating to inflation, growth, financial stability and fiscal policy. Rather, it would reflect a Fed-specific duality happening now: Not only does the U.S. central bank appear to be to lagging behind developments on the ground and the emerging consensus among some other central banks, but it’s also being held hostage to a monetary framework that, while designed to capture structural change, risks being ill-suited for the Covid-disrupted world.

The ECB Governing Council, its highest policy-making entity, is scheduled to meet on June 10, a week earlier than the next meeting of the U.S. Federal Open Market Committee (the equivalent at the Fed). In the run-up to this meeting, there’s been some noise from ECB officials about the possibility of policy discussions considering the case for some reduction in the size of its asset-purchase program.

Such possible ECB considerations of a taper would follow actual steps taken this month by the Bank of Canada and the Bank of England. 1 And they would make the U.S. central bank even more of an outlier in the advanced world as Fed officials almost universally reiterate their long-standing message that it is not time yet to even start “thinking about thinking” about a change in the current “pedal-to-the-metal” policy approach.

This emerging contrast cannot be explained away by traditional drivers of monetary policy. If anything, those factors would suggest that the Fed should be ahead of the other central banks in slowly and carefully tightening financial conditions. As an illustration, consider the following:

*Growth in the U.S. is outpacing that in Europe, and is likely to continue to do so for 2021 as a whole;

*Fiscal policy in the U.S. is significantly more expansionary than it is in Europe;
*Inflationary pressures are more pronounced and broad-based in the U.S. than in Europe, and
*There is a greater proliferation in the U.S. of excessive financial risk-taking in non-banks, which poses a danger to future financial stability.

David Goldsmith

All Powerful Moderator
Staff member
Inflation Forces Investors to Scramble for Solutions

Pickup in consumer-price momentum leaves tough choices in assets like gold, bitcoin​

Signs that inflation is picking up momentum are adding a new dimension to the post-lockdown market rally, forcing investors to make difficult decisions about how to protect their portfolios from the emerging threat.
Investors have a variety of options at their disposal but face near-record prices for old standbys like gold, sending some searching for alternatives that may be even more imperfect. Inflation fears have buffeted stocks, pulling major indexes back from records. Some have even talked up bitcoin as an inflation bet, but it fell as much as 30% during a trading session last week.

The challenge facing investors was apparent this month when new data showed a surprisingly large jump in consumer prices. Rather than rise, a collection of assets generally thought to safeguard investors against inflation fell after the report.

The price of the benchmark 10-year Treasury inflation-protected security logged its biggest one-day decline in a month. Shares of real-estate investment trusts slid the most since January. Commodities were generally flat but dropped the following day.

The three asset classes have vacillated since, but their initial moves showed the unexpected ways that markets can behave when inflation is rising, especially when many are already expensive by historical measures.
This week, investors will gain greater insight into the inflation picture when the Commerce Department updates the Federal Reserve’s preferred inflation gauge, the personal-consumption-expenditures price index. They will also track earnings from the likes of Dollar General Corp. , Costco Wholesale Corp. and Inc.
The stakes are high for investors. Inflation dents the value of traditional government and corporate bonds because it reduces the purchasing power of their fixed interest payments. But it can also hurt stocks, analysts say, by pushing up interest rates and increasing input costs for companies.

Treasury Secretary Yellen Doesn't Anticipate Inflation to Be a Problem

At The Wall Street Journal's CEO Council Summit, Janet Yellen expressed her confidence that the U.S. economy and employment will return to normal by next year.
From early 1973 through last December, stocks have delivered positive inflation-adjusted returns in 90% of rolling 12-month periods that occurred when inflation—as measured by the consumer-price index—was below 3% and rising, according to research by Sean Markowicz, a strategist at Schroders, the U.K. asset-management firm. But that fell to only 48% of the periods when inflation was above 3% and rising.
A recent report from the Labor Department showed that the consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% in March. Even excluding volatile food and energy prices, it was up 3% from a year earlier, blowing past analysts’ expectations for a 2.3% gain.
Analysts say that there are plenty of reasons why inflation won’t be able to maintain that pace for long. The latest year-over-year numbers were inflated by comparisons to deeply depressed prices from the early days of the pandemic. They were also supported by supply bottlenecks that many view as fixable and robust consumer demand that could dissipate once households have spent government stimulus checks.

Before the pandemic, inflation spent years struggling to climb above the Fed’s 2% annual target due in part to structural factors like aging populations in developed countries. Analysts say those forces remain, though many won’t rule out sustained higher inflation and say investors might prepare accordingly.
“We are going through an unprecedented situation—exit from a pandemic accompanied by very supportive monetary and especially fiscal policies,” said Roberto Perli, head of global policy research at Cornerstone Macro.

Protecting against inflation is tricky, however.
Treasury inflation-protected securities, or TIPS, offer the most straightforward option, as their interest payments and principal automatically increase when the CPI rises. When investors buy TIPS, the yields on the securities are lower than nominal Treasurys of the same maturity, but investors can ultimately earn a better return depending on the rate of inflation over the life of the bond.
As of Friday, the yield on 10-year TIPS was minus 0.826%—meaning investors would lose money absent any inflation—compared with 1.629% for the nominal 10-year Treasury note.

That means CPI growth would need to average at least 2.45% over the next 10 years for the inflation-protected security to pay as much or more than the nominal Treasury.
To some, this makes TIPS the safest and best inflation hedge. Investors are nearly guaranteed to get their principal back if they hold the bonds to maturity. At current yield differentials, they can earn significantly more than regular Treasurys if inflation fears are realized.
Still, TIPS returns are likely to be paltry under almost any scenario, particularly if inflation comes below expectations. TIPS prices can also fall along with regular Treasurys—as they did after the CPI report—when investors think rising inflation will push the Fed to raise short-term interest rates.

“When and if the Fed decides that it is time to fight inflation and raise rates, real yields in TIPS are going to cause losses, even if there’s inflation,” said Jim Vogel, an interest-rates strategist at FHN Financial.
History suggests there might be better hedges than TIPS when inflation is especially high. According to the research by Mr. Markowicz, TIPS returns exceeded inflation in 71% of the periods when inflation was below 3% and rising, but only 63% of periods when it was above 3% and climbing.

By comparison, the S&P GSCI Commodity Total Return Index delivered positive inflation-adjusted returns in 83% of the high and rising inflation periods. “Commodities are a source of input costs for companies and they’re also a key component of the inflation index, which by definition you’re trying to hedge,” said Mr. Markowicz.
At the same time, commodities are among the most volatile of all asset classes and can be influenced by an array of idiosyncratic factors.

As it stands, many investors are optimistic about the long-term outlook of commodities, from corn to copper, arguing that prices have room to rise, even after a significant rally this year. Commodities, they argue, could be supported by continued strong demand from consumers and relatively limited supply, as many natural-resource companies take a conservative approach to production.
Darwei Kung, head of commodities and portfolio manager at DWS Group, noted that the widely tracked Bloomberg Commodity Index remains far below the peak it reached before the 2008-09 financial crisis.
Still, “the system itself is very delicate,” he said. Anything that changes supply or demand for commodities “can change the price both directions.”

David Goldsmith

All Powerful Moderator
Staff member

Bullard: Fed 'not quite there yet' to start taper talk

Federal Reserve Bank of St. Louis President James Bullard said Monday that the central bank is not yet ready to pull back on its aggressive monetary stimulus, but could be ready soon.
“We’re not quite there yet, I think we will get there in the months ahead,” Bullard told Yahoo Finance in an exclusive interview.
With the economy still re-opening and over 8 million people still out of jobs relative to pre-pandemic levels, Bullard said the Fed should not yet pare back on its so-called quantitative easing program.

Since the depths of the COVID-19 pandemic, the Fed has been absorbing about $120 billion a month in U.S. Treasuries and agency mortgage-backed securities.
[Read the full transcript of Yahoo Finance Live's interview with St. Louis Fed President James Bullard]
Bullard said vaccinations are bringing the economy “closer and closer” to pre-pandemic form, but said policymakers should not be too eager to pull back support yet.
“I think there will come a time when we can talk more about changing the parameters of monetary policy, I don’t think we should do it when we’re still in the pandemic,” Bullard said.
The Federal Reserve has set US interest rates "in the right neighborhood," but will watch how the economy reacts to factors like the trade war, James Bullard, a key member of the central bank policy board, told AFP on Tuesday. However, Bullard, president of St Louis Federal Reserve Bank, said the Fed "can't realistically move monetary policy in a tit-for-tat trade war." Still, policymakers have "already done quite a bit" to help the economy and account for the uncertainty surrounding President Donald Trump's trade wars.
A main concern among Fed watchers is rising inflation. Earlier in the month, data from the Labor Department showed consumer prices increasing at the fastest rates in over 10 years.
But Fed officials have dismissed a lot of those price pressures on temporary factors, pointing to bottlenecks in supply chains as a “transitory” dynamic that could fade in the short-term.
“We’ll see if the demand really flows through to a lasting increase in inflation or if this is just temporary,” Bullard said. “I think it's mostly temporary but then some of it will flow through to inflation expectations.”
He added that he expects inflation to rise above 2% in 2021 and into 2022.

Time to taper?

Fed Chairman Jerome Powell insisted in late April that it was going to “take some time” for the economy to get to a point where the central bank would feel comfortable slowing those purchases.
“We’ve said that we would let the public know when it is time to have that conversation, and we said we’d do that well in advance of any actual decision to taper our asset purchases,” said Powell on April 28.
Some other Fed officials feel the time to have that conversation is near. Philadelphia Fed President Patrick Harker said Friday that he would like to begin talking about tapering “sooner rather than later.” Dallas Fed President Robert Kaplan has articulated a similar notion for weeks.
“Maybe taking the foot gently off the accelerator would be the wise thing to do here,” Kaplan said on May 20, as reported by Reuters.
Bullard’s “in the months ahead” remark signals the possibility that a recovering economy later this year could kick off taper talks.
The Fed’s next scheduled policy-setting meeting will take place June 15 and 16.

David Goldsmith

All Powerful Moderator
Staff member

Inflation, Money And Supply Bottlenecks​

“The constant refinancing of debt from companies of doubtful viability also leads to the perpetuation of overcapacity because a key process for economic progress, such as creative destruction, is eliminated or limited”.

One of the arguments most used by central banks regarding the increase in inflation is that it is because of bottlenecks and that the recovery in demand has created tensions in the supply chain. However, the evidence shows us that most commodities have risen in tandem in an environment of a wide level of spare capacity and even overcapacity.

If we analyse the utilization ratio of industrial and manufacturing productive capacity, we see that countries such as Russia (61%) or India (66%) are at a clear level of structural overcapacity and a utilization of productive capacity that remains still several points lower than that of February 2020. In China it is 77%, still far from the 78% pre-pandemic level. In fact, if we analyse the main G20 countries and the largest industrial and commodity suppliers in the world, we see that none of them have levels of utilization of productive capacity higher than 85%. There is ample available capacity all over the world.

Inflation is not a transport chain problem either. The excess capacity in the shipping and transport sector is more than documented and in 2020 new capacity was added in both freights and air transport. Ships delivered in 2020 added 1.2 million twenty-foot equivalent units (TEUs) of capacity, with 569,000 TEUs of capacity on ultra large container vessels (ULCV), ships with capacity for more than 18,000 TEUs, according to Drewry, a shipping consulting firm. International Air Transport Association (IATA) chief economist Brian Pearce also warned that the problem of capacity was increasing in calendar year 2020.

One of the important side effects of the chain of monetary stimuli, low interest rates and fiscal stimulus programs is the increase in the number of zombie companies. The BIS (Bank for International Settlements) has shown this phenomenon in several empirical studies. Ryan Banerjee, senior economist at the BIS, identified the constant policy of lowering rates as a key factor in understanding the exponential increase in zombie companies, those that cannot cover their debt interest bills with operating profits. The constant refinancing of debt from zombie companies also leads to the perpetuation of overcapacity, because a key process for economic progress, such as creative destruction, is eliminated or limited. Low interest rates and high liquidity have perpetuated or increased global installed excess capacity in aluminium, iron ore, oil, natural gas, soybeans and many other commodities.

Why does inflation rise if overcapacity is perpetuated and there is enough transport capacity?
We have forgotten the most important factor, the monetary one, or some central banks want to make us forget it. “Inflation is always and everywhere a monetary phenomenon,” explained Milton Friedman many decades ago. More supply of money directed towards scarce assets, be it real estate or raw materials. The purchasing power of money goes down.

Why did they tell us that there was “no inflation” before COVID-19 if money supply increased also massively?
The big difference between 2020 and the past years is that previously, the Federal Reserve or the ECB increased money supply at or below the levels of demand for money (measured as demand for credit and use of currency). For example, the increase in the money supply of the United States was close to 6% with a global demand for dollars that grew between 7 and 9%. In fact, the world maintains a dollar shortage of about $ 17 trillion, according to Luke Gromen of Forest for the Trees. This keeps the dollar or euro relatively stable and a perception that inflation is low. However, there were red flags before Covid-19. There were protests all over the world, including Europe, against the rising cost of living. The world’s reserve currencies export inflation to other countries.

What happened in 2020?
For the first time in decades, the Federal Reserve, and the main central banks increased money supply well above demand. The response to the forced shutdown of activity with massive money printing generated an unprecedented inflationary wave. The economy did not collapse due to lack of liquidity or a credit crunch, but due to the lockdowns.

The 2020 monetary tsunami launched a global boomerang effect with three consequences: Emerging market currencies plummeted against the dollar because their central banks “copied” the U.S. policy without the global demand that the U.S. dollar enjoys. The second effect was a disproportionate amount of money flowing to risky assets joined by more flows to take overweight positions in scarce assets. That excess money made investors move from being underweight in commodities to overweight, generating a synchronized and abrupt rally. The third key factor is that extraordinary measures typical of a financial or demand crisis were taken to mitigate a supply shock, generating an unprecedented rise in money with no added credit demand. More money in scarce assets is not a price increase, but a decrease in the purchasing power of money.

What is the risk?
The history of money since the Roman Empire always tells us the same thing. First, money is aggressively printed with the excuse that “there is no inflation.” When inflation rises, central banks and governments tell us that it is “transitory” or due to “multi-casual” effects. And when it shoots up, governments present themselves as the “solution” imposing price controls and restrictive measures on exports. It is not a theory. All of us who have lived in the seventies know it.
That is why it is dangerous to pursue conglomerate stocks as an inflationary bet… Because when price controls and government intervention increases, margins collapse.
The risk of stagflation is not small, and the so-called value stocks are not a good bet in this environment. In stagflation, commodities with tight supply dynamics, gold and silver, high margin sectors and bonds of stable currencies support a portfolio. However, most sectors underperform as we saw in the 70s, where the S&P 500 generated very weak returns, significantly below inflation.

What can be different from other episodes?
Only a drastic reaction from central banks can change it. However, the question is: Will central banks tighten policy when government deficits are soaring and even a small increase in sovereign yields can generate a debt crisis?
Will they react to what is clearly — as always — a monetary inflationary process?

David Goldsmith

All Powerful Moderator
Staff member

Costco is seeing inflation abound, impacting a slew of consumer products​

Don't tell Costco executives that inflation is low.

The big-box club chain said it's been seeing accelerating prices across a range of products, including shipping containers, aluminum foil and a 20% spike in meat prices over the past month.

"Inflationary factors abound," CFO Richard Galanti said on the company's fiscal third-quarter earnings call Thursday.

"These include higher labor costs, higher freight costs, higher transportation demand, along with the container shortage and port delays … increased demand in various product categories some shortages, various shortages of everything from chips to oils and chemical supplies by facilities hit by the Gulf freeze and storms and, in some cases, higher commodity prices," he added.

Costco reported a profit of $2.75 a share for the period, well above Wall Street estimates. It also saw revenues of $45.3 billion that also beat the Street, which had been looking for $43.6 billion.

Beneath those numbers, though, was a story of how higher prices across the board impacted the chain.

On the plus side, there was a boost from gas inflation as prices at the pump have soared about 30% nationally this year. In other cases, it wasn't so simple.

Like other companies, Costco wrestled with passing costs onto customers. The firm expects there could be some margin pressures, though the degree remains to be seen and there haven't been any significant impacts so far.

Economists largely see the current spate of inflation — one closely followed gauge released Friday estimated the annual pace at 3.1% — as temporary. They list many of the same factors as Costco executives, mainly a string of supply chain issues that have caused spikes in products core to the U.S. economy and household consumption.

Galanti cited price increases as high as 8% and cited goods including pulp and paper, an assortment of plastic products as well as soda and cheese. Some apparel items saw price hikes of 3% to 10%.

Overall, he said the company has gone from seeing inflation in the 1%-to-1.5% range in March to 2.5% to 3.5% today.

"Some items are up more and some items, the sale prices haven't yet changed. And some items are even down a little bit," Galanti said. "We think, again, we've done pretty well in terms of controlling that as best as we can, but the inflation pressures abound."

Costco has worked with its supplies to keep a handle on price pressures. But Galanti conceded that "some of [inflation] has passed through."

In the future, he said items like the warehouse's $4.99 rotisserie chicken and $2.99 40-pack case of water could be impacted.

David Goldsmith

All Powerful Moderator
Staff member

Inflation Bites Chunk out of Personal Income & Spending​

Paying even more to get even less. Exactly what American consumers need the most in these trying times.

So we’ve got a little situation here. We’ve got a little bitty inflation uptick, I mean the worst inflation spike in three decades, and now total personal income from all sources, including from the now fading free-money-from-the-sky stimmies, rose 0.5% in April compared to April a year ago; but adjusted for inflation, “real personal income,” fell 3.0% year-over-year, according to the Bureau of Economic Analysis on Friday.
Month-over-month, and not adjusted for inflation, personal income from all sources plunged 13% in April from March to a seasonally adjusted annual rate of $21.2 trillion – after having spiked by 21% in March for a stimmie-powered historic WTF moment. Every one of the three waves of stimmies triggered a glorious overshoot. So going forward, most of those stimmies have been received and accounted for.
I indicated the 0.5% year-over-year increase in total personal income from all sources, not adjusted for inflation, with the upward-sloping green line. In a moment, we’ll get to what that green line looks like adjusted for inflation.

Personal income just from wages and salaries, not adjusted for inflation, rose 1.0% in April, from March, and will likely increase further in May, as more consumers re-enter the workforce and as employers raise wages in order to attract these people back into the workforce, in what is one of the weirdest labor markets ever, with record job openings, while 16 million people are still claiming state or federal unemployment compensation.

But then there’s inflation, and thereby the erosion of the purchasing power of “real” personal income. Total “real” personal income from all sources — adjusted for inflation and expressed in chained 2012 dollars – according to the Bureau of Economic Analysis, fell by 3.0% year-over-year – hence the downward-sloping green line:

Yup, inflation – the decline of the purchasing power of the dollar, and thereby the decline of the purchasing power of labor – is exactly what the American consumer needs the most in these trying times.
Nevertheless, American consumers gave their darndest to hold up the global economy. In March, consumer spending on durable and nondurable goods had performed a stimmie-driven WTF spike of historic proportions, triggering record trade deficits as many of these goods or their components and materials are imported. But spending on services was still lagging woefully behind.
In April, some consumers still got their stimmies and spent them, and other consumers were spending the stimmies that they’d gotten in March, and overall spending in April held up near the WTF level in March. But what we’re now seeing too is the impact of inflation.
March and April were the first two months back-to-back in three decades where large-scale inflation has cropped up in the data. So it’s time to see how that worked out.
“Real” spending on durable goods dropped by 0.9% in April from March. But not-adjusted for inflation, it rose 0.5%. This includes the mega price increases in used and new vehicles.

“Real” spending on nondurable goods dropped 1.6% in April from March. Not-adjusted for inflation, it dropped 1.3%.

“Real” spending on services ticked up 0.6% in April from March. But not-adjusted for inflation, it rose 1.1%. While spending on goods has spiked to historic highs, spending on services – from airline tickets and hotel bookings to rent – has lagged behind. In April, real spending on services was about where it had been in late 2017.

In total, “real” consumer spending on all goods and services fell 0.1%, but not-adjusted for inflation, it rose 0.5%. You get the drift. Consumers spent even more money to get even less for it:

Everyone now has their own laundry list of goods and services that have suddenly gotten a lot more expensive, or where the price stayed the same, but the goods have gotten smaller or the quality was lowered, or a combination. Astute consumers have been reporting this for months, but in March and April, it started to seriously show up in the data.

David Goldsmith

All Powerful Moderator
Staff member

The Wall Street Players Who Worry Inflation Heralds Wild Markets​

Investors bet that a coming surge of inflation will change 30 years of market behavior​

Some investors are preparing for wild swings in financial markets, worried that inflation, and the Federal Reserve’s pledge to let it rise, will lead to a more volatile world.

The reason: The economic policies aiming to create inflation now are the opposite of the ones that kept markets relatively stable for decades.

Simplify Asset Management recently launched the Interest Rate Hedge ETF, which will seek to take advantage of what its backers see as a titanic shift in markets and is designed specifically to gain from rising longer-term Treasury yields.
The ETF, run by Harley Bassman, a former Merrill Lynch trader who developed a widely followed measure of bond-market volatility known as the MOVE index, will put half its cash in intermediate Treasurys and half in seven-year options referencing a 20-year interest rate of 4.25%. Those options should appreciate as long-term interest rates rise.
That is high compared with current 20-year Treasury yields of about 2.2%. But at higher levels of rates, between 3.5% and 5%, stock and bond prices become more volatile and move in sync—so this ETF is meant to protect investors from that outcome too, Mr. Bassman said.

“The idea of the Fed from 2009 onward was to force money out of safe assets into riskier assets, which would fund growth,” Mr. Bassman said.

Investors bought longer-dated bonds, riskier credit instruments and complex products that directly or indirectly involve selling options to generate income, Mr. Bassman said. These kinds of investments don’t work when inflation and volatility rise, he added.

Other investors agree that the Fed’s focus in recent decades on supporting the economy by keeping financial markets stable will be upended by its more liberal stance on inflation since the Covid-19 pandemic began. In the past, when things got rocky, the Fed boosted liquidity, cut the cost of credit and ultimately buoyed stock prices.

That was a virtuous circle while inflation is low and the Fed could step in whenever volatility jumped—the broad trend of the past 30 years.

But it will become a vicious one, according to Christopher Cole, chief investment officer of Austin, Texas-based Artemis Capital Management. The Fed has promised it won’t tighten monetary policy until inflation is well and truly here and has run hot for a spell.

This means the Fed will end up restricting credit when higher inflation is already making markets more volatile, and that action will feed volatility, making things worse, according to Mr. Cole. “The problem here is if we get inflation—real inflation—it removes the Fed’s monetary ability to support credit, ” he said.

Mr. Cole is well known on Wall Street for a long paper he wrote in 2017. He described how huge amounts of money were in effect betting that volatility would ease and stay low, whether investors knew it or not. A volatility spike in early 2018 proved him right.

He sees danger from the decades that investors have spent getting used to the old paradigm that kept volatility contained. When trouble loomed and stocks fell, investors relied on bond prices being lifted by Fed rate cuts and, since 2008, bond buying. That would provide gains to cushion stock losses. Then easy-money policies would help kick-start more lending—in bond markets as well as by banks—which in turn would lift stocks again.

This pattern, which has played out in all of the downturns since the late 1990s, is behind the popularity of passive investing, balanced portfolios of stocks and bonds and specialist fund strategies such as risk parity and volatility control. All of these make implicit bets that volatility declines or remains low: They are short volatility, in the jargon.

Today more than $1 trillion is still invested in these specialist strategies and trillions more in passive funds, according to analysts. Over $100 billion is invested in strategies that use options to make explicit short volatility bets, having been rebuilt even after last year’s huge volatility spike because once again, the Fed rescued markets.

“The implicit assumption of continued Fed support has massively incentivized the short volatility trade,” Mr. Cole said.

Artemis Capital’s answer is to buy insurance against rising volatility through options markets and bet on trends in commodities and currencies to the same extent as owning traditional stocks and bonds. There is a fifth leg to this stool too: owning alternatives to regular currency, which means gold and to a cautious extent cryptocurrencies.

What adjustments do you plan to your portfolio to address volatility in the markets? Join the conversation below.

Other investors say the greater role government spending began to play during the Covid-19 pandemic will add to the volatility. Governments will want inflation to run hot to help erode the size of the debt they have taken on.

“We know that when the economy slows again, fiscal stimulus will be the answer rather than monetary stimulus,” said Matt Smith, who runs the Total Return Fund of London-based Ruffer LLP.

Ruffer’s long-term view is that trends of the next 30 years will roughly mirror the past 30 years: a steady decline in asset values in inflation-adjusted terms, punctuated by occasional upcrashes, or sudden rallies driven by inflationary injections of government spending or tax cuts.

Mr. Smith said governments such as the U.S. will cut their debts by reducing their real value over time through inflation, as happened after World War II. They won’t do it by trying to repay borrowing with spending cuts and taxes, as they have since the 1990s.

Ruffer’s strategy is to own inflation-linked bonds, gold and potentially bitcoin to protect against inflation—although a recent experiment owning bitcoin ended in April because its huge rally made it too risky.

Mr. Smith is also getting protection against a jump in volatility by betting on corporate debt in credit-derivatives markets: He buys protection against default among the most popular companies that are cheapest to insure, and sells protection on a handful of the most deeply unpopular ones.

To help protect against the risks of inflationary bursts, he also holds shares in companies that do well when bond yields rise. Right now, that means banks, especially cheap U.K. and European ones.

There are other ETFs that offer direct defenses against volatility and inflation—for example, Quadratic Capital Management’s Interest Rate Volatility and Inflation Hedge ETF, run by Nancy Davis. It is set up to profit from rising interest-rate volatility and long-term yields rising faster than short-term yields, while also investing in inflation-linked Treasurys.

Ms. Davis said the fund is meant to be a better protection against inflation than buying esoteric commodities that suddenly prove popular, such as lumber.

David Goldsmith

All Powerful Moderator
Staff member
It Gets Ugly: Dollar’s Purchasing Power Plunged at Fastest Pace since 1982. It’s “Permanent” not “Temporary,” Won’t Bounce Back

The Consumer Price Index jumped 0.6% in May, after having jumped 0.8% in April, and 0.6% in March – all three the steepest month-to-month jumps since 2009, according to the Bureau of Labor Statistics today. For the three months combined, CPI has jumped by 2.0%, or by an “annualized” pace of 8.1%.


David Goldsmith

All Powerful Moderator
Staff member

Red-Hot U.S. Economy Drives Global Inflation, Forcing Foreign Banks to Act​

Central banks are raising rates to fend off a rise in inflation as policy makers respond to the booming U.S. economy​

A booming U.S. economy that is driving inflation higher around the world and pushing up the U.S. dollar is pressing some central banks to increase interest rates, despite still-high levels of Covid-19 infections and incomplete economic recoveries in their own countries.

The world’s central banks are hanging on how the U.S. Federal Reserve will respond to a rise in inflation, wary of being caught in the crosscurrents of an extraordinary U.S. economic expansion. Global stock markets fell on Thursday after Fed officials signaled they expect to raise interest rates by late 2023, sooner than they anticipated in March, as the U.S. economy heats up.

A global march toward higher interest rates, with the Fed at the center, risks stifling the economic recovery in some places, especially at a time when emerging-market debt has risen.

David Goldsmith

All Powerful Moderator
Staff member

Higher Inflation Is Here to Stay for Years, Economists Forecast​

Strong economic rebound and lingering pandemic disruptions fuel inflation forecasts above 2% through 2023, survey finds​

The U.S. could be headed for several years of higher inflation than households and investors have seen since the early 1990s, economists surveyed by The Wall Street Journal forecast.

Americans should brace themselves for several years of higher inflation than they’ve seen in decades, according to economists who expect the robust post-pandemic economic recovery to fuel brisk price increases for a while.

Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.

The respondents on average now expect a widely followed measure of inflation, which excludes volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023.

David Goldsmith

All Powerful Moderator
Staff member

Noah Rosenblatt

Talking Manhattan on
Staff member

haha...issue is the inflation we see now is (i) supply side from shutdowns & (ii) monetary side from Fed printing trillions causing speculative asset inflation as investors search for yield everywhere (iii) labor side from pandemic/fiscal relief wage side.

its ok to think that:

(i) could be temporary/could not be depending on industry/shutdowns, etc
(ii) certainly could be temporary, lumber chart is a great example of a complete reversal (5yr chart below). Housing/rent hmm, tricky, as inventory is an issue and rates are low and banks are being kinda prudent in lending for sales. Not sure what housing correction looks like from severity/depth pov. So these trends likely to contine. Best thing for higher price is higher prices, as eventual it will catch up and correct, hopefully swiftly when it does.
(iii) def an issue. No idea how this resolves


I think a lot of speculative assets that have seen incredible run ups, will or have already, see extended drawdowns. Stocks/HY bonds are near/at record highs, yet some stocks/sectors have been hit 40-50%+, very very complex and mysterious market forces at work. Who knows how it ends and what that does to all the things we use to measure inflation

David has a great point in that all you really need is for people to expect inflation

David Goldsmith

All Powerful Moderator
Staff member
Bringing it full-circle back to RE, inflation in rent & owner’s equivalent rent are now spiking too. These make up a huge fraction of CPI.

They will find a way of removing it from the calculation or at least "adjusting" so that it shows no inflation.

David Goldsmith

All Powerful Moderator
Staff member

The Federal Reserve’s Big Inflation Miss​

If you bet on the central bank’s price forecasts, you lost.​

The Federal Reserve employs hundreds of economists whose job is assessing the American economy. So it is remarkable that the Fed is so wrong so often in its economic forecasts. The latest big miss has been its failure to anticipate this year’s surge in consumer prices