The good news is that US Real GDP grew at 2.3% QoQ in Q3 thanks to massive Federal government and Federal Reserve stimulus. The bad news? Prices are growing at rate of 6% QoQ, three times higher than the growth of real personal consumption.
Runaway inflation, cooling personal consumption. This is the definition of “stimulyltpo”: the excessive spending by Washington DC in conjunction with excessive monetary stimulus from The Federal Reserve.
While the Chinese Wuhan virus (aka, the Fauci Flu) has plagued the world, another Chinese “export” is also suffering what is known as contagion: China’s real estate sector.
Real estate companies Evergrande, Kaisa, Shimao and Chinese Estates are falling like a rock today.
But it has been a steady decline since Q1 2021 except for Chinese Estates. But they have resumed their death dive.
On the debt side, Evergrande is down to 18.856 while Kaisa has lost less (but still quite a bit) and Shimao’s bond look almost like a good investment, relative to Kaisa and Evergrande. But they are all sucking wind. Maybe they all have the Fauci Flu?
Let’s see if this latest Chinese “export” washes ashore in the USA.
I love how The Federal Reserve talking heads, the media, economists like Paul Krugman, all refer to inflation as “transitory” and excessive liquidity as “temporary.”
Let’s look at a variety of alternative investments to the S&P 500, GameStop, Bitcoin, Ethereum and Gold after The Federal Reserve’s and Federal government massive (over)reaction to COVID in early 2020. Gold is the first asset to surge after M2 Money surged, but has declined since. Game Stop had a big surge (likely due to positive vibes on Reddit), but has been volatile and generally falling since “The Surge.” Bitcoin had a delayed surge as did Ethereum. Despite fear about government regulation, Ethereum in particular remains elevated.
The “temporary” stimulus has resulted in the lowest M2 Money velocity in history. And we will have to see if the “temporary” excess liquidity in the financial system is truly temporary.
Here is a chart to show the “Stimulytpo” effect on commercial and industrial loans which surged (including PPP loans) but have simmered down to pre-COVID levels.
The earnings for GameStop were terrible (down 39.7% YoY). But at least Christmas season is upon us and maybe GameStop will surge with a good retail spending season.
But what happens to markets if the Federal government “stimulypto” is removed? If it ever is.
Like John Belushi from The Blues Brothers, Fed Chair Jerome Powell is saying that the markets lackluster response in terms of bond yields to his “hawkish” announcement yesterday “isn’t his fault.”
(Bloomberg)Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.
While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.
“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.
This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”
Or it could be that no one REALLY believes that Central Banks will ever cut interest rates, despite surging inflation.
The US Treasury 10-year yield dropped 7 basis points overnight and remains just south of 1.50%. The Eurozone remains below 1% (with Germany at -0.358% and France at -0.009% at the 10-year mark). Japan is at 0.039%. This is what Powell means by low global rates keeping US long-term rates down.
The 10-year Treasury term premium (measured before Powell’s head fake on raising rates) has returned to pre-Biden levels.
Meanwhile, global equities futures are up across the board (well, except for Mexico).
The Fed could have raised their target rate if they were REALLY interested in cooling inflation. The Taylor Rule remains at 14.94% while The Fed is stalled at 0.25%. Even if you don’t like the Taylor Rule, it still highlights how ridiculous Fed Stimulypto is.
Well, we do have a government-propelled economic recovery, but at a cost of declining REAL wages thanks to the highest inflation rate in 40 years.
The Fed’s new theme song is “Hold That Tiger” meaning that despite soaring inflation rates, The Fed kept their target rate at 0.25%. Way to really pull a Volcker and raise rates to choke off inflation. … NOT!
However, The Fed doubled the pace of tapering to $30 billion a month. Median forecast shows three rate hikes in 2022, three in 2023.
The reaction? The Dow rose 363 points as of 3:36pm EST and the 10-year Treasury yield rose a measly 1.9 bps as markets celebrate The Fed DOING NOTHING TO CURB INFLATION.
If price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperiled and the social contract is threatened.
During the past several quarters, U.S. inflation has surged—now running about triple the Federal Reserve’s 2% target. The surge in prices is unlikely to reverse on its own. The longer that prices are unstable, the greater the challenge to the conduct of macroeconomic policy. The last thing the country needs is its third major economic upheaval in a decade and a half.
The consequences of inflation—and the attendant risks—have long been understood. In 1898 economist Knut Wicksell explained: “Changes in the general level of prices have always excited great interest. Obscure in origin, they exert a profound and far-reaching influence on the whole economic and social life of a country.”
I agree with the op-ed, but as Paul Harvey liked to say, “And now for the rest of the story.”
The Federal Reserve is only half of The Federal government “Stimulypto.” Starting in late 2008, The Fed crashed their target rate to 25 basis points and began their quantitative easing (QE) program where The Fed purchased Treasuries and Agency Mortgage-backed Securities (MBS) amongst other assets. Notice in the chart below that QE was adjusted, but never went away and The Fed’s target rate only was increased once before Trump’s election as President, then raised eight times then decreased five times. And no rate increases under Biden. So The Fed scorecard is Obama/Biden: 1 rate increase. Trump: 13 rate changes. And The Fed’s balance sheet has gone bananas since the COVID outbreak.
Inflation, as measured by the Consumer Price Index (CPI) didn’t really take-off until March 2021 as a result of STIMULYPTO (excessive monetary stimulus + Federal government spending).
Here is the Federal government spending surge that helped generate the highest inflation in a generation.
So while the op-ed author blames inflation solely on The Federal Reserve, The Fed was unable to achieve its inflation goal for much of the post-financial crisis period. It was the double whammy of Fed monetary stimulus + Federal government stimulus (spending) that pushed inflation to 6.8%.
Following Paul Harvey’s “The Rest of the Story,” I choose baseball player Whammy Douglas to represent the double whammy of Fed + Fed government stimulus to produce inflation. THAT is the rest of the story.
Throw in the Biden Administration’s war on fossil fuels (driving up energy costs by over 50%) and we have a TRIPLE WHAMMY!!
The WSJ op-ed author was focused only blaming The Fed. Sorry, it was a Double Whammy.
Inflation-adjusted return of Treasuries fell to lowest since the 1980s. For bond investors, this is their version of Kevin’s Famous Chili from The Office! Or The Fed’s Famous Chili!
(Bloomberg) — Treasury investors are losing more money than they have in four decades, once inflation is taken into account. And if markets are right, they’re unlikely to come out ahead for years.
The federal government’s debt has already lost about 2% outright over the past year as the Federal Reserve started removing pandemic-era stimulus from the economy and inched closer toward raising interest rates. But on top of that, the consumer price index has surged 6.8%, putting investors even deeper in the hole.
Taken together, that’s resulting in the worst real returns — or those adjusted for inflation — since the early 1980s, when then Fed Chair Paul Volcker was in the midst of fighting a wage-price spiral. What’s more, the dynamic isn’t expected to change: The bond market is projecting that 10-year Treasury yields will hold below the inflation rate for the next decade, meaning any investment income will be more than wiped out by the rising cost of living.
If we look at the REAL 10-year Treasury yield and REAL Fed Funds Target Rate, they are both negative.
Let’s see if Powell spills his famous chili on Wednesday at 2:00PM EST. The Fed keeps saying they are serious about controlling inflation, just like Kevin Malone.
The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else.
Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Jimmy Carter was president in the early 1980s — and in the lifetimes of most Americans.
And the CPI change since last year, according to the Federal Reserve of St Louis FRED is a staggering 16.262%.
And with U.S. Jobless Claims plunge to 52-year low, its about time that The Fed begins removing the humongous monetary stimulus.
After all, largely thanks to Federal Reserve policies, we have seen the greatest wealth redistribution in US history … to the top 1%.
Just look at this chart of the University of Michigan Buying Conditions For Houses index. It was positive (meaning above 100) until shortly after COVID struck and The Federal Reserve rode to the rescue. National home price growth was already at 4.57% YoY in March 2020, then ballooned to 19.51% YoY at the last reading.
Here is the same chart with the broader M2 Money stock and The Fed’s Balance sheet. Same results, just not as dramatic as M1.
We will soon find out if The Federal Reserve will announce a rate hike or taper news. They are likely to confirm tapering, particularly if they believe that tapering won’t roil markets. After all, then Fed Chair Janet Yellen and the FOMC decided to let the Fed’s balance sheet taper (white line) while, at the same time, increasing the Fed’s target rate (yellow line). The S&P 500 index rose 9.5% over the taper/rate increase period of 12/29/2017 to 8/30/2019.
But since Stimulypto (2/28/2020 to 11/30/2021), the Fed’s balance sheet doubled+ from $4,158,637 to $8,681,771. And The Fed Funds Target Rate (UB) immediately fell from 1.75% in February 2020 to 0.25% in March 2020 … and has stayed there ever since. The S&P 500 index rose 54.6% over this Stimulypto period.
But The Fed’s upcoming decision on December 15, 2021 may be a Yellen-pivot (taper balance sheet, but raise The Fed Funds Target rate). But, then again, maybe not. The Fed is getting really bad about forward guidance and choose instead to surprise us. Hence, this is why an a-political rule is preferred (such as the Taylor Rule).
Unfortunately, the Taylor Rule infers a Fed Funds Target rate of 15.50% (using CPI YoY running at 6.20% YoY. If The Fed raises their target rate by 25-50 basis points at the December 15th meeting, color me surprised.
So, the Powell Pivot may just be the Yellen Pivot after all.
Confounded Interest - Anthony B. Sanders 
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