According to the Taylor rule, the fed needs to raise prime rates to inflation plus 2% to avoid spiraling inflation, that is, 11%. Hope you enjoy double digit borrowing rates or spiraling inflation.
Instead we're going the demand side route: keep making everyone poorer until people stop buying things.
Hell, AFAICT I’m still living off the money I got from unemployment insurance two years ago and have just been banking the cash for the job I’ve had for the last year (and a day, yesterday was my anniversary apparently).
Inflation is now moving increasingly towards these two categories, which indicates that it could be around much longer even if supply chain issues get resolved.
So if a transient spike lasts long enough to be considered "inflation", then it gets baked into wage increases, which leads to higher prices, which leads to higher inflation, which leads to wage increases...
Unfortunately, the govt thinks of monetary policy as their only tool to fight inflation, when in fact they have a much stronger, better one: public policy.
The govt should be passing emergency legislation to vastly increase supply of the three main contributors to family spending: housing, healthcare, transportation, and education.
Make it MUCH easier to build housing.
Vastly incentivize cheap car replacements (ebikes, etc).
Loosen drug import laws from Europe & CA like, yesterday.
High energy costs are also not here to stay. There's very clearly the post-pandemic supply shock which has spilled over into high energy costs due to a bullwhip effect. And there's the war in Ukraine, which will not last forever. There's also a buildup in inventories now (the bullwhip is coming back around) and there's no huge demand for container ships from China right now. High energy costs didn't stick in 2007, they didn't stick in 2014 and they won't stick this time. Commodities/Energy inflation is cyclical.
If I was locked into some 8% loans now there are worse places to be. Yes I'd take a bit of a hit, that's life.
> And you can get ≈50% putting money into Argentina Government Bonds
For a few months until they default, sure. There's a reason they're so cheap.
Also, the market would not react well if the Fed signalled they'd go any higher than 5%.
If I knew 11% was happening, I think I'd liquidate to cash now, then go 60/40 when it happens. (Currently I'm 100% equities.)
I’m 90% in equities, with a short position in German Bunds (their treasuries) as a hedge. I’m also borrowing against those equities (at a 2.18% rate), so you could say I’m 137% in equities. This feels risky, but I don’t know what I could do otherwise.
I hate the idea of sitting in cash with a guaranteed negative real rate of return of about -10% per year, even if it’s for a short period of time.
Also, what happens if the Fed doesn’t stamp out inflation in that case? Wouldn’t that force people to buy equities like crazy?
Obviously no one knows the future so I'm heavily tilted to small cap value and equal-weight large cap value funds, which seem to do well in inflationary times.
Are you getting 2% margin loan from something like IB or M1?
With what vehicle are you short those Bunds? I'm curious.
I’m in Sweden so I’m getting it from my broker: https://www.avanza.se
> With what vehicle are you short those Bunds? I'm curious.
I bought a bit of this: https://www.avanza.se/borshandlade-produkter/certifikat-torg...
Do you think that applies to all equities, and if so why?
I’ve mostly bought equities that I think will do relatively well in an inflation environment, e.g. because they have a lot of fixed assets and pricing power. For example I’ve bought nuclear power in France, uranium mines in Canada and Amazon. But admittedly I haven’t had time to really research their financials.
Why would stocks like that loose 40% though? If the Fed really stamps out inflation by drastically raising rates then shouldn’t the market see the end of it pretty soon and be willing to bet on stuff that will survive (as a store of value in real terms)?
At a very rough level, no. Stocks are valued based on discounted cash flow (in general and over the long term. Plenty of short-term exceptions, i.e. Tesla future earnings costing 18x more than Fords future earnings).
A higher interest rate, i.e. inflation, lowers the value of those future earnings.
Stock prices today represent an extreme historical outlier in terms of the price people are paying for future earnings. This might make sense if we assume low inflation for the next 30 years. It does not make sense in a high inflation scenario.
Reasonable scenarios allow the market to fall another 30-50% over the next year or two.
Reasonable scenarios allow the markets in 10 years to be roughly where they are today in absolute terms (i.e. before adjusting for inflation).
Not necessarily. A company with pricing power can raise prices in an inflationary environment.
But if the risk free interest rate goes up then it will be tempting to park money there instead of course. That requires the Fed really stamping out inflation though, which I’m not sure they will do.
I would not be surprised to see equities doing worse than -10%. Sometimes there are no good investments, only loss mitigation, and cash is not necessarily a bad idea.
I wouldn’t be surprised by that either, but it’s the wrong question. As long as the expected value of the future price (in today’s USDs) is higher than -10% I’m interested in buying (but the actual decision is a bit more complicated).
But I agree cash is not necessarily a bad idea.
I’m originally from the Bay Area, as were my parents, and the family who still live there are sitting on valuable houses. My dad’s parents bought a house in San Jose in the ‘50s, my uncle’s wife ultimately ended up with it an sold it for multi-millions. My step father’s mother has a house in San Leandro that was bought in the ‘50s and is worth maybe $700k — maybe, totally guessing here.
Other family left the Bay Area over the years and bought houses which are nowhere near as valuable because the local markets don’t support that kind of price increases.
In ‘90-91 my stepdad’s work closed and some of the people transferred to South Carolina where they bought literal mansions from the difference in housing prices between the Bay Area. A few years later that place closed and they couldn’t sell their houses because nobody could afford them in the local market.
Long story short, it depends.
Most of the current debt will have to be refinanced.
I would be relatively happy to see inflation drop while interest rates are above 10%. I could secure my financial future at much lower risk in that world.
I'm not ideally positioned for that eventuality, because I didn't (and still don't) predict that outcome, but it would certainly be an opportunity-filled moment were it to occur.
Honestly, "enjoy" is overstating the situation. The macro economy around such a circumstance would probably be miserable, so I would probably be unhappy. But, I would be happy to have the opportunity that such a moment would produce.