Where will inflation stop?

In reply to Flynlow (FS) :

I just typed out a response, but it got way too long. If you're interested in this stuff, i.e. emergency programs that were created in 2008-2009, then you should read Geitner's Stress Test. Essentially, most of what they (Treasury, Fed, etc) did during '08 was provide liquidity to a bunch of different organizations by any means possible to prevent bank runs and the collapse of the financial system. I think in this situation you want the Fed to have junk MBS on it's balance sheet because if Fanny/Freddy collapse and the overnight market locks up we're all deeply, deeply boned while the Fed can absorb the losses by just sitting on them. 

As far as reform the system, read up on Dodd/Frank and make your own conclusion. At the very least the Fed has a lot more tools at it's disposal than last go-round. When Covid hit in 2020 they used them to backstop the market and avoid the recession...which is the outcome that we'd hope for.

https://finance.yahoo.com/news/fed-seizing-control-entire-u-144633849.html

CrustyRedXpress said:

In reply to Flynlow (FS) :

I just typed out a response, but it got way too long. If you're interested in this stuff, i.e. emergency programs that were created in 2008-2009, then you should read Geitner's Stress Test. Essentially, most of what they (Treasury, Fed, etc) did during '08 was provide liquidity to a bunch of different organizations by any means possible to prevent bank runs and the collapse of the financial system. I think in this situation you want the Fed to have junk MBS on it's balance sheet because if Fanny/Freddy collapse and the overnight market locks up we're all deeply, deeply boned while the Fed can absorb the losses by just sitting on them. 

As far as reform the system, read up on Dodd/Frank and make your own conclusion. At the very least the Fed has a lot more tools at it's disposal than last go-round. When Covid hit in 2020 they used them to backstop the market and avoid the recession...which is the outcome that we'd hope for.

https://finance.yahoo.com/news/fed-seizing-control-entire-u-144633849.html

Thanks for the reading suggestion, I will check it out. 

I can understand the logic behind a temporary, short term relief program to avoid runs on the banks and people panicking because they can't get cash.  I don't agree, but I understand it as a valid suggestion to put forth.  Alternatively, 1.) we already have a program in place to prevent runs on the bank, in that all accounts under $250K for consumers are insured through FDIC, and most runs on the banks are normal consumers trying to get cash out of their checking accounts, not business calling accounts due at Wall Street, and 2.) that excuse has been put forward to avoid a "liquidity crisis", but it has been going on for 10+ years.  That is not a short term fix, but evidence of a systemic problem.  For the Covid 2020 example, that was also the original timing of the Fed pulling back bond purchases and raising rates.  So was the March recession a Covid drop, or the market panicking when the free money spigot got turned off for the first time in a decade?  I'm genuinely curious to see as it starts to be implemented again this year. 

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.  As they are so fond of telling us, "All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value, even all their value, if market conditions sour."  They risked big on CDOs, and lost.  Time to pay the piper.  By subsidizing their losses, we have enabled them to increase their leverage and not learn from their mistakes.  Letting them fail would have rendered Dodd-Frank unnecessary, the painful experience would have self taught them some risk management and self control.  Again, let the free market work.   It would not have been the end of the world.  Even worst case, if ALL the large commercial/wallstreet banks failed, regional and local banks would have continued to lend (in lesser amounts and under higher conditions/restrictions, certainly) and would have grown and flourished.  The Fed can lend money to those banks under pre-2007 programs without issue for liquidity. 

But again, this is just one worldview of many.  I don't think the Feds job is to avoid recessions, I think they are a natural economic condition that prunes the deadwood and punishes overly leveraged/risk-taking investors, leaving room for more prudent investors and businesses to flourish and take their place.

Flynlow (FS) said:

 

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.  As they are so fond of telling us, "All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value, even all their value, if market conditions sour."  They risked big on CDOs, and lost.  Time to pay the piper.  By subsidizing their losses, we have enabled them to increase their leverage and not learn from their mistakes.  Letting them fail would have rendered Dodd-Frank unnecessary, the painful experience would have self taught them some risk management and self control.  Again, let the free market work.   It would not have been the end of the world.  Even worst case, if ALL the large commercial/wallstreet banks failed, regional and local banks would have continued to lend (in lesser amounts and under higher conditions/restrictions, certainly) and would have grown and flourished.  The Fed can lend money to those banks under pre-2007 programs without issue for liquidity. 

Correct.

In reply to Flynlow (FS) :

I see an analogy with our Forestry Department....

In the past, we had frequent but relatively small wild fires.  People became intolerant of them and the Forestry Department became more activist in putting them out until so much fuel had accumulated that their capabilities were overwhelmed and we had infrequent but massive wild fires.

In my mind, the question is...

Are we now smart enough (i.e. new tools and analytical capabilities at our disposal) to render frequent but relatively small recessions a thing of the past (we're now in a 14 year bull market where full economic cycles of bear to bull to bear historically ran 7 to 10 years) or is the Fed and Treasury just the next iteration of the Forestry Department that has positioned us for the equivalent of a wildfire.

I'm of the thinking that we'll see something in the middle where we'll have a good, honest correction but not economic collapse since the economy is somewhat abstract (we can hand the next generation a huge pile of debt if we want) but we can't magically will fires to occur on the next generation's watch.

Because I'm a visual learner, and other may be as well

In reply to STM317 :

I feel slightly better about a $28 Trillion deficit seeing this.  Slightly.

Streetwiseguy said:

Flynlow (FS) said:

 

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.  As they are so fond of telling us, "All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value, even all their value, if market conditions sour."  They risked big on CDOs, and lost.  Time to pay the piper.  By subsidizing their losses, we have enabled them to increase their leverage and not learn from their mistakes.  Letting them fail would have rendered Dodd-Frank unnecessary, the painful experience would have self taught them some risk management and self control.  Again, let the free market work.   It would not have been the end of the world.  Even worst case, if ALL the large commercial/wallstreet banks failed, regional and local banks would have continued to lend (in lesser amounts and under higher conditions/restrictions, certainly) and would have grown and flourished.  The Fed can lend money to those banks under pre-2007 programs without issue for liquidity. 

Correct.

The flaw with that thinking is the banking community isn't just based on size.  
   Overnights flow from big to little as well as little to big.  Banks meet balance requirements by borrowing from each other.  One bank has surplus cash and lends it or a portion of the surplus to a bank that is short.  A small town bank gets a big deposit and rather than just let it sit there lend it to another bank

    The problem is if just one major bank gets in trouble there likely isn't enough small banks to  take all of the shortfall.  
 Instability is horrible for the banking industry and in turn  for America 

frenchyd said:

Streetwiseguy said:

Flynlow (FS) said:

 

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.  As they are so fond of telling us, "All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value, even all their value, if market conditions sour."  They risked big on CDOs, and lost.  Time to pay the piper.  By subsidizing their losses, we have enabled them to increase their leverage and not learn from their mistakes.  Letting them fail would have rendered Dodd-Frank unnecessary, the painful experience would have self taught them some risk management and self control.  Again, let the free market work.   It would not have been the end of the world.  Even worst case, if ALL the large commercial/wallstreet banks failed, regional and local banks would have continued to lend (in lesser amounts and under higher conditions/restrictions, certainly) and would have grown and flourished.  The Fed can lend money to those banks under pre-2007 programs without issue for liquidity. 

Correct.

The flaw with that thinking is the banking community isn't just based on size.  
   Overnights flow from big to little as well as little to big.  Banks meet balance requirements by borrowing from each other.  One bank has surplus cash and lends it or a portion of the surplus to a bank that is short.  A small town bank gets a big deposit and rather than just let it sit there lend it to another bank

    The problem is if just one major bank gets in trouble there likely isn't enough small banks to  take all of the shortfall.  
 Instability is horrible for the banking industry and in turn  for America 

Nationalize.  

Streetwiseguy said:

frenchyd said:

Streetwiseguy said:

Flynlow (FS) said:

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.

Correct.

    The problem is if just one major bank gets in trouble there likely isn't enough small banks to  take all of the shortfall.  
 Instability is horrible for the banking industry and in turn  for America 

Nationalize.  

I... better not say what I'm thinking.

In reply to Duke :

Those that know you, know.

Streetwiseguy said:

frenchyd said:

Streetwiseguy said:

Flynlow (FS) said:

 

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.  As they are so fond of telling us, "All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value, even all their value, if market conditions sour."  They risked big on CDOs, and lost.  Time to pay the piper.  By subsidizing their losses, we have enabled them to increase their leverage and not learn from their mistakes.  Letting them fail would have rendered Dodd-Frank unnecessary, the painful experience would have self taught them some risk management and self control.  Again, let the free market work.   It would not have been the end of the world.  Even worst case, if ALL the large commercial/wallstreet banks failed, regional and local banks would have continued to lend (in lesser amounts and under higher conditions/restrictions, certainly) and would have grown and flourished.  The Fed can lend money to those banks under pre-2007 programs without issue for liquidity. 

Correct.

The flaw with that thinking is the banking community isn't just based on size.  
   Overnights flow from big to little as well as little to big.  Banks meet balance requirements by borrowing from each other.  One bank has surplus cash and lends it or a portion of the surplus to a bank that is short.  A small town bank gets a big deposit and rather than just let it sit there lend it to another bank

    The problem is if just one major bank gets in trouble there likely isn't enough small banks to  take all of the shortfall.  
 Instability is horrible for the banking industry and in turn  for America 

Nationalize.  

In one sense we have a "national" bank. The Federal reserve.   But since it's not responsible for the effects of the market but rather responds to them. It's not a solution.  
   The real solution is to enforce the rules and laws banks are required to adhere to.  
   Here is one case for a big powerful government. To carefully audit various banks to ensure the interests of the people are met rather than the profit of the bank. 

STM317 said:

Because I'm a visual learner, and other may be as well

Thanks for posting that, it's a great visual.  What's interesting (and scary) to me, is that basically all of the gains of the S&P500 marked in yellow ONLY occured during the QE periods.  The rest of the time it was largely flat.  I look at the non QE areas as "real" growth, and the rest as "wildly subsidized to the point of insanity".  Especially QE4.....was that level of money cannon REALLY necessary to prevent apocalypse?  And I expect the small portion of gains in 2017 are solely attributable to the corporate tax change rate from the TCJA, and without dragging this into politics, I don't see that as real gains either, just front-loading economic growth from future years' earnings.  It looks a lot like a house of cards to me. 

Duke said:

Streetwiseguy said:

frenchyd said:

Streetwiseguy said:

Flynlow (FS) said:

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.

Correct.

    The problem is if just one major bank gets in trouble there likely isn't enough small banks to  take all of the shortfall.  
 Instability is horrible for the banking industry and in turn  for America 

Nationalize.  

I... better not say what I'm thinking.

 

Realistically, that's what you did.  The Fed hurled money at the big banks that were leveraged to an absurd level, to keep them from going down and taking all the taxpayers with them.  However, by bailing the banks out instead of taking them over, there is no punishment for the evil-doers, and no way to claw the cash back.  Bail out the depositors by taking over the bank, then sell it back to someone who doesn't get a massive bonus for "earning" a billion dollars in bailout money.

Another update on the ships waiting to get into LA / Long Beach, the tally is actually 105!  Which is an all time high. 

As noted previously, some of these are slow sailing, a lot of them are going in circles off of Baja CA (Mexico).  For the ones off of Mexico, most appear to be doing 1-2 kts (counter acting wind I would guess).  Also of note, they will be burning the very dirty bunker fuel doing that (they have to run diesel within a certain radius of CA).

So.... supply chain, at least at the ports... appears to be getting worse.  Not good news for those issues soon.  I am not sure why.  Maybe attempts to "catch up" from the shipping deficits is creating more backup?  Also of note, the latest surge is likely to take out a lot of port workers for a few days at least, which will certainly create an even worse bump.

https://www.freightwaves.com/news/new-year-brings-new-all-time-high-for-shippings-epic-traffic-jam

In reply to aircooled :

I talked to a supplier today about a US-made product. Expected delivery? 24-28 weeks. 

It's not just the Chinese stuff that is taking forever. 

Streetwiseguy said:

Duke said:

Streetwiseguy said:

frenchyd said:

Streetwiseguy said:

Flynlow (FS) said:

In my opinion, far more of the commercial banks should have been left to twist in the wind post-2007.  If they can stabilize their books and pay their debts, great.  If not, break them up, let them go bankrupt, whatever.

Correct.

    The problem is if just one major bank gets in trouble there likely isn't enough small banks to  take all of the shortfall.  
 Instability is horrible for the banking industry and in turn  for America 

Nationalize.  

I... better not say what I'm thinking.

 

Realistically, that's what you did.  The Fed hurled money at the big banks that were leveraged to an absurd level, to keep them from going down and taking all the taxpayers with them.  However, by bailing the banks out instead of taking them over, there is no punishment for the evil-doers, and no way to claw the cash back.  Bail out the depositors by taking over the bank, then sell it back to someone who doesn't get a massive bonus for "earning" a billion dollars in bailout money.

That's how I feel about the airlines. Or any other "too big to fail" business that has no real penalty for bad decision making. If I make poor investments, go buy a new Z car, and get fired from work then it's on me to have sufficient savings. Let them fail to foster competition, innovation, and responsibility or nationalize them.

As for container ships, I keep seeing that Americans have been on a shopping spree since March of 2020 without slowing. Amazon delivery trucks are everywhere. Amazon is booming. The malls stay busy. We're a consumer nation and we're consuming more to cope with higher stress. I liken it to the gambling in video games rulings that hit the AAA studios a few years ago with their loot box mechanics. Or Robinhood with investing, last year. Gamifying the experience to exploit psychology. Now go look at the Amazon app with lightning deals or Summit sending me a push notification to save $5 INSTANTLY on an app order. A large part of what we consume is just for the fix of buying, that little rush that we keep chasing with our thumbs. And the housing market. And wardrobes, with everyone either getting pandemic fit or, more commonly, pandemic less-fit. And hobbies. I couldn't find Hawk brakes for my Mustang that were better than blues and wound up calling Carbotech, they had to make some to send me. (Great folks, from what I can tell. 2 thumbs up so far) The container ship problem is resolved when we stop buying stuff long enough to clear the backlog, as long as we keep chasing happiness in an Amazon box it's just going to get worse.

As an aside, it'd be great if we could stop buying stuff now and not burn as much bunker fuel on deliveries we're not even going to remember ordering.

As an aside aside, did ya know it's cheaper to ship meat to China/SE Asia for processing and packing and then back to the US than it is to do it here? There's a clue as to why your local grocer is out of chicken/beef/pork.

Early in the pandemic, personal savings rate skyrocketed higher than ever. It's been falling since then, and we're now back to pretty much average savings rate from the decade prior to the pandemic:

So, lower savings presumably means increased spending. It seems like consumers haven't really started to pull back on spending due to price increases yet. At least we don't have to worry about scary deflation I guess...

If I had to guess, I'd say that because the vast majority of American fit in a few group when it comes to spending patterns:

- Has enough income that they don't care about price increases on any item, big or small ticket. (Small percentage of overall)

- Has enough income to plan for a certain amount of variability in big ticket items, and small ticket items aren't an issue (Middle Class)

- Not enough income to even consider big ticket items, but perfectly fine with normal consumer spending. (Lower/Middle Class)

- Poor enough that assistance programs allow for them to spend as normal, even if not on luxury items. (Poverty Line)

I don't think we're going to see a big slowdown in spending until prices are so high that the middle class can't buy stuff. I think that'll show up in the housing market first. 

People won't stop spending until they have to. Which is usually some time after the point where they should.

Normally high inflation will bring increased interest rates, causing slowdowns, sometimes snowballing into recession. But since it's no longer even close to a free market economy it's anybody's guess. The economy no longer plays by the rules.

I do quite like  RX Reven's analogy and wondered something similar myself

CPI data for January is out. The topline is that year-over-year the CPI increased by 7.5% (or 6% without energy and food), and that the month over month increase was .6%. Both of those numbers are more than most economists predicted and the rate of increase was down from it's recent highs of .9%

https://www.nytimes.com/2022/02/10/business/economy/inflation-cpi-january-2022.html

So what?

The report, along with a string of strong job reports, probably increases the liklihood that the Fed jumps rates by .5% in March. We're coming into the corner hot and the fed is trying to decide how hard to hit the breaks.

https://www.yahoo.com/entertainment/analysis-hot-inflation-builds-case-173442178.html 

7+% YOY increases for consecutive months, frequently surprising "experts" seems like entering the corner plenty fast, without a good idea of the braking zone. If any of you are holding much cash, maybe reconsider. Equities have been on sale this year, and that's probably going to continue with rate hikes.

Gonna get worse before it gets better.  Gonna get worse before it gets better.  Gonna get worse before it gets better.  Tra-la-la-la-la!

Edit:  I do hold a Bachelor's Degree in Finance, so the information above  is well-researched and carefully considered.

And the big deal is that the CPI doesn't even measure a lot of big ticket stuff like infrastructure and commercial construction. Those costs are way up over the last 2 years, like 3x-4x that 7% number.  That will eventually come home to roost in the future CPI once those costs perk down to the retail level.

1988RedT2 said:

Gonna get worse before it gets better. 

For this to "get worse" do you mean that we'll have out of control inflation, out of control stag-flation, or a recession triggered by the fed raising the rates too far, too quickly?

I assume that the Fed can control inflation through rate hikes (a la Volker in the early 80's) and will do so if necessary, so out-of-control inflation seems unlikely. We're in a period of historically low unemployment, so stagflation seems unlikey as well. 

So the risk is that the Fed has to kill the economy to drive down inflation, correct?

It's a fairly complex issue.   And don't be too sure that the Fed will take the necessary steps in a timely fashion.  The short term consequences of appropriate action may be counter to the interests of the party in power.  

http://www.themoneyenigma.com/government-debt-inflation-the-important-role-of-fiscal-policy/

https://www.thestreet.com/investing/can-the-federal-reserve-stop-inflation