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Inflation

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As someone once said, those who ignore the lessons of history, tend to repeat its mistakes.
From Zerohedge.
Yesterday, the spread between 2- and 10-year yields rose above 1% (and in the past 24 hours yield curve has blown out another 10bps to 110bps) for the first time since 1981, when Paul Volcker was engineering hikes that broke the back of double-digit inflation at the cost of a lengthy recession and millions of unemployed workers.

2s10s_2.jpg

A similar dynamic is unfolding now, according to Ken Griffin, the chief executive officer and founder of hedge fund giant Citadel. “We have the setup for a recession unfolding” as the Fed responds to inflation, Griffin told Bloomberg in an interview in Palm Beach.


“Every time they take the foot off the brake, or the market perceives they’re taking their foot off the brake, and the job’s not done, they make their work even harder,” Griffin said.

What does the the historical record say?

One question history can help answer, is how long this continued deep inversion could last. Here is what DB's Jim Reid found when asking just this question:

  1. If we look at the last 70 years of hiking cycles, we can see that the curve on average flattens from around the first hike to 12 months after. It then stabilizes for 6 months and then starts steepening.
  2. Alternatively, if we look at what happens before a recession, on average the curve hits its most inverted around 3 months prior to a recession before seeing a substantial steepening over the next 12-18 months, especially in the first three months of the recession.
Click to expand...
And as a corrolary, history has shown from the past that during recessions, the USD tends to appreciate against everything else, including gold. From Fed Boston Bank
Since the US dollar is the world’s dominant currency, the United States benefits from the “exorbitant privilege” of paying low interest rates on safe (risk-free) dollar-denominated assets, such as the bonds issued by the US government. When global risk aversion is elevated, investors tend to hedge against uncertainty by switching to dollar-denominated assets, a form of insurance termed the “exorbitant duty” that comes with serving as the world’s reserve currency.
While the international macroeconomics literature has a clear understanding of the flight-to-safety effects imposed upon the United States during crises, it provides no answers about what types of exogenous shocks trigger the dollar’s exorbitant duty behavior and by what channels these shocks are transmitted. The authors study how the US dollar responded to the Fed’s monetary policy actions during the Global Recession, defined as 2008:Q4 through 2012:Q2, and find that Fed easings during this period actually led the dollar to appreciate, thus triggering its “exorbitant duty” in a way that runs counter to conventional wisdom. The authors use a novel decomposition of the exchange rate response to study the channels that led to this appreciation and propose a theoretical model that reconciles and explains these novel findings.
  • Contrary to the accepted wisdom which predicts that cutting US interest rates will cause the dollar to depreciate, the authors show that the US dollar significantly appreciated in response to the Federal Reserve’s monetary policy easing(s) over the course of the Global Recession. Furthermore, the currencies for which the dollar serves as a hedge are those that lost the most value against the dollar in response to accommodative monetary policies enacted during the Global Recession.
  • One channel that caused this appreciation was a flight-to-safety effect manifested in the currency risk premium component of exchange rate changes. Across currencies, those for which the dollar serves as a hedge are the ones that lost the most value against the dollar through this flight-to-safety effect in response to Fed easings. These differences in effects across currencies underpins the cross-currency heterogeneity in the overall dollar appreciation. As a source of this flight-to-safety effect, the authors show that a US monetary policy easing that lowered US forward rates by 1 percentage point led to an increase in estimated investor risk aversion of between 28 and 43 percent during the Global Recession.
  • The second main channel pushing the dollar to appreciate was that Fed easings lowered the expected future path of US inflation relative to other countries.
  • Another aspect of the dollar’s “exorbitant duty” that was triggered by these Fed easings is the transfer of financial wealth from the United States to the rest of the world. A US monetary policy easing that lowered US forward rates by 1 percentage point led to a significant decline of US net foreign asset positions worth up to 18 percent of US GDP. The part of the resulting loss due to changes in asset valuations alone was high as 17 percent of US GDP.
  • All the empirical findings can be explained by a theory in which calendar-based forward guidance during this period, the Fed’s monetary policy that was intended to be accommodative, had conveyed a strong signal that future US GDP growth would be lower than economic agents previously expected. A US monetary policy easing that lowered US forward rates by 1 percentage point also caused a downward revision of US GDP growth expectations of between 0.71 and 1.03 percentage points.
Click to expand...
Buckle down boys, we may be in for a wide ride.
Mick
 
waterbottle said:
Must've been hard for JPowell to keep his composure.

Regardless, she's asking relavent questions of the Fed. Probably won't get much traction in the media until the end.
Click to expand...
Reality is that her party is in government and have a lot more measures to tackle inflation.
Both the Biden and previous governments all failed in preventing it.

Fed is doing the right thing imo. This "everything bubble" needs to pop. Unfortunately the uber rich will scoop up cheap assets. But it will make it easier on the next generation.

I was kind of aware that it might play out like this last year.
 
waterbottle said:
Must've been hard for JPowell to keep his composure.

Regardless, she's asking relavent questions of the Fed. Probably won't get much traction in the media until the end.
Click to expand...
relevant questions but is Powell the person to ask , surely some of the Fed. Presidents ( rather than Chairman Powell ) would be more experienced and have better inside knowledge , Powell was an investment banker , selected by Trump and re-endorsed by Biden , to be the front-man for the Fed .. Government liaison if you like

now if they were asking Powell about directions in infrastructure spending , or maybe directions in energy policy , Powell would have three or four true experts on speed dial , for anything he didn't understand very clearly already

the media is basically just a presentations group now .
 
moXJO said:
Reality is that her party is in government and have a lot more measures to tackle inflation.
Both the Biden and previous governments all failed in preventing it.

Fed is doing the right thing imo. This "everything bubble" needs to pop. Unfortunately the uber rich will scoop up cheap assets. But it will make it easier on the next generation.

I was kind of aware that it might play out like this last year.
Click to expand...
the uber-rich ( and relatives of senior politicians ) get to hear all the rumours and sales pitches first , now Powell through 'the old boys network' may hear that same gossip early on , but if 'Fed policy ' moves too early , small investors will wake up and stop playing in the/bond/stock/money markets .. big finance is no fun without rubes to loot .

i disagree on the next generation ( in the majority ) the ones that will do best will be self-taught street smart grifters taking advantage of the over-confident elites ( and disappear in the resulting tirade )

the governments ( decades of them ) and the Fed. created this mess .. the normal exit plan is a huge all-distracting war
 
divs4ever said:
the uber-rich ( and relatives of senior politicians ) get to hear all the rumours and sales pitches first , now Powell through 'the old boys network' may hear that same gossip early on , but if 'Fed policy ' moves too early , small investors will wake up and stop playing in the/bond/stock/money markets .. big finance is no fun without rubes to loot .

i disagree on the next generation ( in the majority ) the ones that will do best will be self-taught street smart grifters taking advantage of the over-confident elites ( and disappear in the resulting tirade )

the governments ( decades of them ) and the Fed. created this mess .. the normal exit plan is a huge all-distracting war
Click to expand...
Unfortunately it seems that wars mini or large seem to the achiles heel to solve most problems caused by governments and religion
 
waterbottle said:
Biden seems to be campaigning on higher tax rates, sounds like a plan for austerity. Company tax rates to be lifted to 28% from 21%....
Click to expand...
we will see about that , hardly anybody gets to read what is actually in the various spending bills until well after they are passed

good luck on getting what Biden promises
 
divs4ever said:
the uber-rich ( and relatives of senior politicians ) get to hear all the rumours and sales pitches first , now Powell through 'the old boys network' may hear that same gossip early on , but if 'Fed policy ' moves too early , small investors will wake up and stop playing in the/bond/stock/money markets .. big finance is no fun without rubes to loot .

i disagree on the next generation ( in the majority ) the ones that will do best will be self-taught street smart grifters taking advantage of the over-confident elites ( and disappear in the resulting tirade )

the governments ( decades of them ) and the Fed. created this mess .. the normal exit plan is a huge all-distracting war
Click to expand...
Between AI, war, recession it feels like the commoners will cop it
 
moXJO said:
Between AI, war, recession it feels like the commoners will cop it
Click to expand...
that is the usual outcome , but heck it might be actually different this time

maybe a new French Revolution will be a guide ( France must be getting close to the major EU power , by now )
 
over9k said:
I hope you guys moved your shite into USD a while back ;)
Click to expand...
actually i avoided the USD ( as cash ) although several stocks i hold have exposure

i see the US declining into a train-wreck economy

i would rather be buying stuff like beef jerky and rice , what i do though is keep a very low debt exposure ( as assets or liabilities )
 

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