Sorry, I consulted the wrong tab and dropped in the wrong link. It’s really https://www.bls.gov/cpi/questions-and-answers.htm#Question_10, which is BLS, not richmond fed.
Yeah, I spoke of interest due. You mentioned profits as if they were equivalent.
The money supply expanded, and price within those sectors rose to match. Or do you deny the near 1:1 correlation between the stock market and fed balance sheet?
What do you call it when the money supply expands and price levels move up almost identically to match it?
Your link is totally unrelated to your quote.
From the BLS.
Now, I did make the mistake of mentioning rent, which I will acknowledge is part of the CPI. But you have to look at the weighting used on these factors, and which factors are tallied and which are actually used in the oft quoted CPI figure. This soup of equations trying to tie inflation to just one number and then operating on it as gospel is rather silly anyway, but simply mentioning it in a group doesn’t actually mean it’s accounted for in a reasonable fashion.
But You said inflation was low. Okay, which specific measure(s) of inflation are you using if not the CPI? And what about the rest of the economy, outside of consumer spending? You mentioned other measures, but which ones are you using, personally, to reach your conclusion?
Just speaking on consumer prices, Tuition and healthcare costs have not been rising at a “low” rate by any stretch of the imagination. Tuition averages 8% per year. Heathcare is all over the place, but only ever less than 3% in one year. Rent, even going by the government statistics, has increased an average of 4% per year since the mid 80’s. Prices for actual homes and asset prices in general on the other hand… hah.
Still, I’ve been quite clear about distinguishing between just consumer prices and inflation in general.
Again, the point I was making is that if the Treasury goes out and issues 2.2T in bonds to pay for this recent bailout, and the Fed buys 2.2T in bonds, every dollar of interest paid by the Treasury goes to the Fed which turns around and pays every single one of those dollars back to the Treasury (potentially minus any small operational costs.) They don’t lose 6% of that to the member banks as you were implying.
If it’s assets, I’d call it an asset bubble. ‘Asset Price Inflation’ is also acceptable. If it’s good and services, I’d call it just plain inflation. That is the way the termis used, your realize, right?
Well, again, there are multiple indices that try to measure inflation. So it isn’t “one number.” CPI is most well-known, but they all show low inflation over the past couple of decades, and especially since the Great Recession. If you can find a well-balanced measure that shows high-inflation (US), I’d be curious to learn about it. But conflating a rise of asset prices with inflation, or cherry-picking certain segments of the economy (health care, education) while ignoring others (food, consumer electronics) isn’t very meaningful.
Asset price inflation is not the same as consumer price inflation, but it can still represent a financial danger. Both the first and second of Bush-43’s two recessions were provoked by asset price inflation, as was the Crash of 1929; and the same is true of the present fall in stock prices. (Is it true that one way to tell if stocks are overvalued is that corporations will undertake big buy-backs to keep their stocks over-valued? :rolleyes: )
PLEASE: I am NOT developing a criticism of the present “stimulus”, nor do I offer any prescription for avoiding asset-price inflation. I WILL however attempt to make a case that price bubbles on the recent scale are unusual, and should have been interpreted as warning signs.
Asset prices are set in part by the supply and demand for money. Investors will bid up the prices of stocks, bonds or paintings when other demand for their money is low. Thus low interest rates should always be considered a big warning sign.
I think many of us would be less eager to gamble on stock market returns if we could get a healthy 4% or 5% buying safe government bonds!
In this post I’ll content myself with the claim that the present low interest rates are unusual, using the yield on 10-year Treasury debt as a benchmark. In the graph see that this benchmark interest rate was near 6% during the Clinton boom, briefly going under 5% just once. The way to think of this is: Demand for money, by businesses with good ideas, was so high that the U.S. Treasury had to offer 6% to attract lenders!
That current benchmark rate is 0.70%. Zero with a Z. Even the 2018 high was lower than any point shown prior to the 2008 crisis. Some investors think locking in a 0.7% yield is the best place for their money?
Although the FRED graph starts in 1960, I’m looking at a data series which shows the same 10-year Treasury yield all the way back to 1871. A 3.37% rate in 1886 is the lowest rate shown in the first 27 years; and the benchmark never fell below 3% until 1935. (Don’t worry whether these rates were nominal or real: From 1879 to 1932 a troy ounce of gold sold in New York City for a constant price of $20.67. Exactly.)
Even in 2010, the benchmark got as high as 3.84%. Except for a brief excursion in 1941, 2012 was the first time in history the rate was below 2%. And now it is 0.7%. With a Zero.
I don’t know where we go from here. It does seem amusing that sanguine and sanguinary have the same etymology.
This was a great post, septimus. And I certainly want to be clear that while asset bubbles are a separate concept from inflation, I certainly do not want it to come across as though I think they are harmless. I can see how it might have read that way, but I do worry about the asset bubble. For one thing, on the purely selfish side, it sucks to be in the capital accumulation phase of one’s life and have nowhere to invest. That’s screwing a lot of people between the ages of 30 and 60, who are trying to fund their 401ks or buy houses. But it also has the systemic risk of blowing a lot more of the economy up when it does crash.
That said, a world with an asset bubble and low inflation is tough from a policy perspective. There’s no ready-made playbook for it. I’d lean towards thinking that during non-crisis times - 2012-2019 would have been a good choice, and we’ll be out of this woods eventually, too - the Fed should move aggressively to stamp out the asset bubble. They didn’t do it because inflation was low, and pushing into deflation has its own risks, and they probably won’t do it for the same reason next time, too.
The one thing I am sure about is that the moves to put a floor under stocks, by empowering the Fed to buy equities directly, is a terrible idea. They should almost certainly not be being corporate debt either.
Going up more today. Boy those investors must just love contagion and death!
Looks like they had second thoughts. But I think a lot of this is the effect of traders, not investors.
People are buying cheaper stocks - that probably makes a lot of sense, actually, if you figure that by this time next year the coronavirus will be dealt with and we will realize a V shaped curve.
But markets will go lower because the numbers will be so bad you’d have to have some kind of superhuman urge to ignore them. You can’t invest in an economy in which there is no activity. It just doesn’t make sense.
Not to mention that sometime in the next 4-6 weeks people are really going to start needing some liquidity in a bad way.
This is pretty much exactly what I thought. A small - both in terms of volume and time - production cut to keep SA and Russian budgets from completely collapsing, but still keeping production high enough to push high-cost producers out of business.
This article in NYT explains that some investors and hedge fund traders are buying now because the prices are so low, plus other factors listed below.
It just still seems really weird to me. It makes sense about the lower stock prices, I guess. But it still seems strange that the extreme job loss numbers haven’t had a negative effect on the markets.
I feel like the “these are the best prices we’re ever going to see - gotta buy!” statements I see all over the place are so weird. A lot of investors - pros, even - seem to have completely internalized that the inflated prices we’ve seen lately are permanent. I still think they’re wrong.
Even when the economy opens up, probably a good 30-40% of the population (minimum) will have a severe cash shortage. The thing about economic distress is that even if the government tells people “Don’t worry, we’ll bail you out,” that’s not reassuring. Income is reassuring, and until people see stable incomes, you have economic distress.
Maybe investors are confident that the corporations themselves are going to get direct infusions of cash from the government, large banks, or the Fed? I still don’t see how that solves the cash problem in the long run, considering how democratized markets are now.
My wife and I have not changed our investing at all. And neither of us are superhuman. It’s not difficult to form a plan and execute it.
I’m not necessarily suggesting that you or anyone else do so – a year or two from now, the market might well prove that buying the S&P500 now is on the cheap. You’ve obviously got the resources to survive this.
What I’m saying, however, is that the economy for the whole is turning into a shit show for the bottom 25-50% of the country. The stimulus might take some of the financial pressure off for a few weeks, but it’s income that’s the issue now. America’s got a bad combo of high HH debt and low income.
There are political consequences for taking away socioeconomic mobility from the bottom half of the country. There are also political consequences of having the top 5-10% perpetually afraid of living near the bottom 50%.
I’m not sure whether to be a long-term bull or bear when it comes to markets, but when it comes to democracy: I’m incotrovertibly a bear. I don’t see how it survives.
So your ‘plan’ is to do nothing and carry on the same as before, even though the situation has changed radically?
“Just ignore that howling crowd with pitchforks setting up a guillotine outside. They’ll go away soon enough. Would you like some more cake, my dear?”
The immediate, clearly imaginable effects of COVID-19 are:
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30-40% of people (not counting the homeless in most cases) in immediate extreme financial distress, meaning worried about not being able to pay either the rent, the car note, the utilities bills, or some other important payment. We’re not even talking about health insurance, which they are probably going to lose within weeks if they had it to begin with.
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state governments, which are actually large employers in their own right, are going to face extreme financial challenges. In fact they may not be able to sustain paying for unemployment benefits beyond a few months (if even that long). These systems were not designed to take on the kinds of pressures they’re facing now.
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state and municipal employee pension funds may get wiped out completely, which is going to be a political problem. Your retired police officers aren’t going to be too happy.
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municipal and metropolitan transit authorities may have problems functioning routinely for some time, and may never completely recover, which could leave some people who rely on public transit economically stranded.
These are economic impacts that are clearly predictable in the next few months. America’s going to have a cash problem, and before too long, the priorities of Americans won’t be investing in companies that aren’t actually making any money right now, but rather spending whatever cash they can get their hands on, on themselves. Keep in mind the administration is even talking about allowing Americans to raid their IRAs to get cash – not exactly something that’s going to help markets.
Federal stimulus is good and it’s good that they’ve been able to agree to stimulus this quickly. The problem is making sure it gets into the right hands immediately, and I have no confidence that this is going to happen, especially when one of the administration’s first moves was to remove oversight of how the funds would be distributed. It’s clear that this administration’s priorities are not economic stimulus but setting up a political rewards and punishment system and using this is a tool to force companies and financial interests to ‘play ball’ with the administration during an election year.
I don’t see any mobs. They are all inside obeying social distancing.
Ever heard of something called a ‘metaphor’?
I’m expecting tomorrow to be the start of an interesting period in the markets, as earnings start to roll in. There’s one hypothesis that the market is fully expecting earnings to be horrible, basically for all of 2020, and is looking past that towards the rebound in 2021-2022, and has risen on that optimism. Another hypothesis is that in the absence of earnings data, the market mostly reacted to the epidemiological ‘good news’ (hey, US deaths really did seem to peak on Friday/Saturday!) in hopes that that would translate into economic good news in the the next two quarters.
But the data dry spell is over. We’re going to get a deluge of first quarter earnings, and potentially, some valuable forward looking forecasts from companies. The only problem I’m having is that I have no real clear idea of what the market as a whole is expecting in terms of earnings. Any forecast more than a couple of weeks old is useless, and honestly, I’m not sure anyone is even believing the new ones. There’s also the compounding factor that companies may have had a perfectly good first two-thirds of the quarter - or even more - so backward-looking good news could be misleading. Just for context, I started mandatory work-from-home on March 4, and Seattle was ahead of the curve on most of that. LHoD started this thread on Feb. 24. It feels like this was all many months ago, but it wasn’t. ‘Expect volatility again’ is my best guess.
I think the worst of it will probably start to come in another 2-4 weeks once the cash crunch starts to inflict pain on consumers and small businesses. This reality is also what concerns me because it’s going to put a ton of pressure on local and state officials to open up local restaurants and face-to-face business.
All the talk is about what Trump is or isn’t going to do – his decision-making is relevant in terms of getting federal workers asses in federal office seats, but a lot of the “most important decisions in our lives” will be made by local mayors and governors. I hope they make the right ones or we’ll be right back where we are now, and the next time, the governments will have a lot less credibility. And markets will get shocked then just like they’ve been shocked now.
Governments themselves - from Italy’s and Spain’s national governments to Anytown, USA are going to be faced with financial crises of their own. This is going to be a huge problem for the recovery.
We’re just getting started, and this will happen in waves.