Inflation

[mullokintyre]

I'm still not sold on the US being recession-proof. Just because their economy is diversified doesn't mean they're not susceptible to recession. And the manufacturing that you mentioned isn't coming online until years down the track, so it's redundant when considering what's happening in the near term.

US is been really good at recessions, don't see why they will escape another one.

. Why can't we go back to ZIRP?

Exactly. its all they have in the toolbox, so they will bring em down as fast as they took em up.As Einsten said,
" The definition of insanity is doing the same thing over and over and expecting different results. "
Mick

 

[over9k]

Current debate in the U.K is 25 vs 50, there's not even a thought of a pause.

 

[over9k]

View attachment 160498

Current debate in the U.K is 25 vs 50, there's not even a thought of a pause.

Boe hikes 25

 

[wayneL]

Boe hikes 25

...and still neg real rates.

 

[over9k]

...and still neg real rates.

For now, yes.

 

[over9k]

I'm still not sold on the US being recession-proof. Just because their economy is diversified doesn't mean they're not susceptible to recession. And the manufacturing that you mentioned isn't coming online until years down the track, so it's redundant when considering what's happening in the near term.

Well it's not about being recession proof so much as it is how much the rate rises pummel inflation vs pummel the economy. Rate rises obviously cannot contract inflation without also contracting growth but how balanced those contractions are depends on the economy. The yanks have the best balance referece rate rises pummeling inflation without the economy going to hell in a handbasket as well. Other countries are overwhelmingly tipped in the other direction. If rate rises have a much higher proportionate effect on inflation vs economic growth for the americans than other countries then this makes the U.S economy far better able to weather said rate rises (pummel inflation) without tipping into recession.

The other thing to keep in mind is the demand vs supply side of the equation. Pumping rates overwhelmingly hits the demand side. But what do you do if your demand side is already going anyway? Or if it's a supply side problem?

Comparing USA vs europe is an easy one to show with this because europe imposed a whole mountain of sanctions (cut off their supply of) russian oil that the yanks just didn't on account of the U.S not really being supplied with russian oil in the first place.

This gives europe a supply side restriction of the equation that must be balanced by restricting the demand side as well. The U.S does not have this problem - the equation is not unbalanced by russian oil sanctions because they were never being supplied with russian oil to begin with.

This is just one of many factors that enable the U.S economy to weather rate rises far better than, say, europe. There's a whole stack of others (demographics and labour supply being a huge one) but I probably don't need to write everyone a novel for them to get the point.

RE: rates, not sure where exactly CBers are going to go from here.

Neither. They're soon going to be stuck between a rock and a very hard place. Immigration is the *only* thing keeping quite a lot of economies growing/going now.

Aus is a very easy example of this - if this country depends so much on china, and china's going to hell in a handbasket, a substitute must be found or a new economic model must be adopted. Those are the only two options.

I take your point about the long end of the curve now playing catch up with the short end, but my gut still tells me that something will eventually break and force CBers to cut. That's based on a historical record that demonstrates rapid hikes are followed by a pause and eventually rapid cuts.

With you on this too, but what's going to give? Are we going to hit nasty recession(s) and they just let inflation run rampant in response?

There is no easy way out here.

Besides, it's the only explanation IMO for why CBers are "pausing to determine the effects of hikes" - why pause if you don't think you're harming the economy? I thought the inflation dragon had to be slayed for economic and political purposes?

Depends who's in power and which way the political winds are blowing. Fact is that central bank governors are appointed by politicians.

I suspect that CBers are privy to other data/discussions that the public aren't, hence the general anxiety with, and rhetoric for, further hikes (except for BoE and RBNZ) despite "sticky inflation".

See I think it's the opposite of this bottle - jerome powell seems to be the only one really really pushing the "we're going to pummel inflation no matter what" narrative.

With the exception of NZ, all the others seem extremely hesitant to give their economies the exact painful medicine they need.

Are they perhaps all too aware of what it will mean (reference recession) if they do?

A world with 5.x% interest rate after a decade of ZIRP is going to be a huge shock to growth for the world, particularly ex-US, as most companies with huge amounts of cash on hand to fund operations are American based. Why can't we go back to ZIRP?

Are you asking me in a literal/economic sense or in a political sense?

Why we can/can't do something economically is a very different question than why we can/can't do it politically.

 

[mullokintyre]

South American economies are leading the pack in being the first to drop rates.
Brazil joined uUugay and Chile in dropping.
And they didn't muck around, knocking 50BPS from the benchmark.

Imagine having rates ratchet up to 13,75% and staying there for a year before this event.
Must be tough getting a mortgage in Brazil.
Mick

 

[over9k]

So the long duration stuff has bounced again today and this is now the question:



According to this dude, and I agree with him completely, it's "Everything, risk assets in particular. At the moment everything is being priced as if inflation is going to come back down and this recent spike was just a flash in the pan. If that proves to not be the case, yields will continue to rise as they have been lately. Whether this is the beginning of markets repricing that risk or just a bit of jitters remains to be seen".

I don't think it's going to remain at "just market jitters". I'm still sticking with my "the curve will deinvert because the long end soars, not because the short end dumps" prediction I've been making for, what, at least a year now?

I think that right about now is when the proverbial snowball has, as we'll see in X months time, started rolling.

I'm going to bookmark this post to quote it again in 6 months' time or whatever it ends up being.

 

[over9k]

Meanwhile:




We're just tipping over seasonality now, with the cold playing havoc on russian oil supply as well as demand for heating oil, gas etc in europe.

This also feels like the beginning of a tipping point just like the long duration bond bounces.

 

[over9k]

With moves like this we're looking at a deinversion in just over a week.

 

[over9k]

Good grief, if you didn't know better you'd think he was talking about here.

 

[divs4ever]

Well it's not about being recession proof so much as it is how much the rate rises pummel inflation vs pummel the economy. Rate rises obviously cannot contract inflation without also contracting growth but how balanced those contractions are depends on the economy. The yanks have the best balance referece rate rises pummeling inflation without the economy going to hell in a handbasket as well. Other countries are overwhelmingly tipped in the other direction. If rate rises have a much higher proportionate effect on inflation vs economic growth for the americans than other countries then this makes the U.S economy far better able to weather said rate rises (pummel inflation) without tipping into recession.

The other thing to keep in mind is the demand vs supply side of the equation. Pumping rates overwhelmingly hits the demand side. But what do you do if your demand side is already going anyway? Or if it's a supply side problem?

Comparing USA vs europe is an easy one to show with this because europe imposed a whole mountain of sanctions (cut off their supply of) russian oil that the yanks just didn't on account of the U.S not really being supplied with russian oil in the first place.

This gives europe a supply side restriction of the equation that must be balanced by restricting the demand side as well. The U.S does not have this problem - the equation is not unbalanced by russian oil sanctions because they were never being supplied with russian oil to begin with.

This is just one of many factors that enable the U.S economy to weather rate rises far better than, say, europe. There's a whole stack of others (demographics and labour supply being a huge one) but I probably don't need to write everyone a novel for them to get the point.



Neither. They're soon going to be stuck between a rock and a very hard place. Immigration is the *only* thing keeping quite a lot of economies growing/going now.

Aus is a very easy example of this - if this country depends so much on china, and china's going to hell in a handbasket, a substitute must be found or a new economic model must be adopted. Those are the only two options.



With you on this too, but what's going to give? Are we going to hit nasty recession(s) and they just let inflation run rampant in response?

There is no easy way out here.



Depends who's in power and which way the political winds are blowing. Fact is that central bank governors are appointed by politicians.



See I think it's the opposite of this bottle - jerome powell seems to be the only one really really pushing the "we're going to pummel inflation no matter what" narrative.

With the exception of NZ, all the others seem extremely hesitant to give their economies the exact painful medicine they need.

Are they perhaps all too aware of what it will mean (reference recession) if they do?


Are you asking me in a literal/economic sense or in a political sense?

Why we can/can't do something economically is a very different question than why we can/can't do it politically.

of course they are 'recession-proof ' the government will tell the ( social ) media to shadow-ban recession references , and they will trot out corrupted economists and mathematicians with new definitions and the new government 'disinformation team will go into action as well

whether the US tax-payer is comfortable or not really doesn't matter to the top-level guys

 

[waterbottle]

With you on this too, but what's going to give? Are we going to hit nasty recession(s) and they just let inflation run rampant in response?

There is no easy way out here.

Recessions can be deflationary though. It's why the PPI has been falling in Germany and China (although the latter isn't yet officially in recession). It's why commodities have been slammed for the past year.
Furthermore, the Fed has cut in the past despite CPI being high or trending upwards, only for it to fall following a recession - probably because it's backward looking data, e.g. 1990, 2000, 2019.



As for what's breaking, I would say there are many parts of the economy (US included) that are impacted by the rate hikes but have not yet been demonstrated in data:

1. Q4 2022 we saw multiple tech companies commence job cuts that are still occurring albeit at a slower rate
2. 1Q 2023 we saw two US banks (SVB & signature) fail
3. 2Q 2023 we are companies continue to report missed earnings and dismal outlook. Tech companies are reporting relative improvements compared to a crap Q4 '22. AAPL revenue down for 3 quarters. PYPL & SQ with poor guidance. Oil majors with poor profits!

Depends who's in power and which way the political winds are blowing. Fact is that central bank governors are appointed by politicians.

True, but everyone has a vested interest in maintaining political and societal stability. It was only last year that we had several labour unions striking due to wages not keeping up with inflation. That was mild compared to the events overseas where inflation was truly out of control e.g. Sri Lanka.

See I think it's the opposite of this bottle - jerome powell seems to be the only one really really pushing the "we're going to pummel inflation no matter what" narrative.

With the exception of NZ, all the others seem extremely hesitant to give their economies the exact painful medicine they need.

Are they perhaps all too aware of what it will mean (reference recession) if they do?

I personally think they know a recession is the only way to truly "reset" this - i.e. get the world off of ZIRP. Force a recession with higher rates, then cut back to some sort of mid level and restart QE + government spending for the "new green economy". The US already has a bunch of infrastructure spending ear-marked.

Are you asking me in a literal/economic sense or in a political sense?

Why we can/can't do something economically is a very different question than why we can/can't do it politically.

Politically and economically.

Why can't we just keep kicking the can down the road, as we've been doing since the 80s? ZIRP forever, baby.

 

[qldfrog]

Well it's not about being recession proof so much as it is how much the rate rises pummel inflation vs pummel the economy. Rate rises obviously cannot contract inflation without also contracting growth but how balanced those contractions are depends on the economy. The yanks have the best balance referece rate rises pummeling inflation without the economy going to hell in a handbasket as well. Other countries are overwhelmingly tipped in the other direction. If rate rises have a much higher proportionate effect on inflation vs economic growth for the americans than other countries then this makes the U.S economy far better able to weather said rate rises (pummel inflation) without tipping into recession.

The other thing to keep in mind is the demand vs supply side of the equation. Pumping rates overwhelmingly hits the demand side. But what do you do if your demand side is already going anyway? Or if it's a supply side problem?

Comparing USA vs europe is an easy one to show with this because europe imposed a whole mountain of sanctions (cut off their supply of) russian oil that the yanks just didn't on account of the U.S not really being supplied with russian oil in the first place.

This gives europe a supply side restriction of the equation that must be balanced by restricting the demand side as well. The U.S does not have this problem - the equation is not unbalanced by russian oil sanctions because they were never being supplied with russian oil to begin with.

This is just one of many factors that enable the U.S economy to weather rate rises far better than, say, europe. There's a whole stack of others (demographics and labour supply being a huge one) but I probably don't need to write everyone a novel for them to get the point.



Neither. They're soon going to be stuck between a rock and a very hard place. Immigration is the *only* thing keeping quite a lot of economies growing/going now.

Aus is a very easy example of this - if this country depends so much on china, and china's going to hell in a handbasket, a substitute must be found or a new economic model must be adopted. Those are the only two options.



With you on this too, but what's going to give? Are we going to hit nasty recession(s) and they just let inflation run rampant in response?

There is no easy way out here.



Depends who's in power and which way the political winds are blowing. Fact is that central bank governors are appointed by politicians.



See I think it's the opposite of this bottle - jerome powell seems to be the only one really really pushing the "we're going to pummel inflation no matter what" narrative.

With the exception of NZ, all the others seem extremely hesitant to give their economies the exact painful medicine they need.

Are they perhaps all too aware of what it will mean (reference recession) if they do?


Are you asking me in a literal/economic sense or in a political sense?

Why we can/can't do something economically is a very different question than why we can/can't do it politically.

I tend to often differ with you but kudos, and great post

 

[mullokintyre]

View attachment 160518

Good grief, if you didn't know better you'd think he was talking about here.

Bit hard to read that small writing, can you post the link to the original article?
Mick

 

[waterbottle]

View attachment 160518

Good grief, if you didn't know better you'd think he was talking about here.

Agreed, this reads like Australia. I'm having flashbacks to the early 2010s when Sydney property prices kept booming despite the threat of a double dip recession and the EU looking like it were about to blow up.
Anecdotes and newspaper articles reported on several auctions where Chinese buyers would turn up with suitcases of cash to buy property and push out local. This was hushed by government, stating that the Foreign Investment Review Board was tasked with stopping this therefore it couldn't happen.
Turned out that the FIRB was asleep at the wheel and those buyers were cashed up foreigners trying to flee a shitty government and gain Aus citizenship by making a significant investment...

 

[waterbottle]

Bit hard to read that small writing, can you post the link to the original article?
Mick

It's a post on reddit

 

[waterbottle]

@over9k is this you?

Bill Ackman says he's shorting 30-year Treasury bills, and yields could hit 5.5% 'soon'

Billionaire investor Bill Ackman says bond market may reprice the long end of the curve "in a matter of weeks."

www.cnbc.com

 

[sptrawler]

Well as we said a few years ago, the Government can only inflate away its debt and it looks like it's working.
Poor old fall guy Phil, takes one for the team. ?
While Jimbo explains how inflation is bad and we must get a handle on it.
Keep pumping those prices baby. ?

Economy could shrink under interest rates and tax: RBA

The economy is facing its worst non-pandemic year since the 1990-91 recession as high interest rates, inflation and taxes hit the nation’s consumers.

www.smh.com.au

From the article, when you cut the bloatware and the fan club fluff out: ?
The Reserve Bank has conceded there is a chance the economy could shrink this year under the weight of inflation and its string of interest rate rises, as households struggle to pay their mortgages and increasingly large tax bills.

As Westpac economists predicted Treasurer Jim Chalmers was on his way to delivering the first back-to-back budget surpluses since 2007-08, the RBA said households were likely to pay $1 of every $10 of their disposable income covering the interest bill on their home loans.

Consumers are also being hurt by a surge in tax, partly due to higher wages growth, the end of the federal low- and middle-income tax offset and the effect of inflation on goods and services.

“Real incomes have been weighed down by continued high inflation, strong growth in tax payments and higher net interest payments, as well as declines in small business incomes,” it said.
It noted the stage three tax cuts, due to start from July 1 next year, would “support income and consumption”.
Loading
All of that extra tax is helping governments cover the deficits left by the pandemic. The biggest winner is shaping to be Chalmers, who has already confirmed a surplus of more than $20 billion is likely for the 2022-23 budget.
But Westpac senior economists Bill Evans and Andrew Hanlan said the revenue stream, and lower than expected spending, would result in Chalmers delivering a surplus for the current financial year as well.

They said the 2023-24 budget, rather than showing a deficit of $13.9 billion, was on track to be in the black to the tune of $11 billion.
In the following year, the budget would return to deficit, but was likely to be around $16 billion rather than the $35.1 billion Chalmers had forecast in May.
Evans and Hanlan said Chalmers was facing a “combined improvement in the cumulative budget positions over the three years of $62 billion”.

 

[wayneL]

Short Aussie bonds with ears pinned back.

https://www.news.com.au/finance/economy/australian-economy/finance-guru-mark-bouris-makes-rates-prediction-all-aussies-want-to-hear/news-story/71a16b5ef4a56eb460f4015c559f64fc