Lucid arricle dealing with a complex subject. It would be great if you could shed light on one of the great mysteries of our time and the genesis of the Fed's current actions. Why didnt inflation rear up in the past decade after GFC
I have heard explanations like globalism (outsourcing of manufacturing and pollution) and JIT supply chain operations and the deflationary effects of recession. Now that those phenomena are being reversed, in addition to QE, the Russia conflict, an oversupply of dollars and labor shortages, it makes for an inflationary environment
"The benefits of low rates has run dry." In order for there to be a benefit, wouldn't one need a truth oracle that is better than markets at pricing risk and time preference? Otherwise, wouldn't any manipulation of market rates would be more likely to result in increased malinvestment? If the argument is that the central banks are such oracles, does their prediction track record support that position?
The issue is that the connection between rates and inflation is very complicated, and under some market conditions could be inverse - meaning higher rates can lead to higher inflation. For example, look at rent. no one uses loans to pay rent, but almost everyone use loans to buy a house. Higher rates can lead to lower housing prices because of financing issues, which gives a signal to build less houses, which increases rents, which cause higher inflation.
Under current market conditions this is a real worry.
Yes, the only thing that's kept housing high is very tight supply. But as George Gammon has pointed out (in 3 fast, easy steps!) at some point higher rates will decrease demand and lead to price decreases in nominal terms, and much more in real (inflation adjusted) terms
If you're looking for income, maybe bonds or dividend stocks; back in the day if you had 8% interest and you could save a few hundred K you could live off the interest.
I‘m reading this in chapters. It’s like a mini manuscript! I’m not all done yet, but I love it so far. It ads a lot of value to me, because it makes me think about things from a new angle. Your writing (and thus your thinking) is very clear. Thanks, Bear!
I noticed plotting US10Y - US03M looks cyclical (same for EU). Lower bound:0% upper bound 3%. Do you think it could be used as a entry/exit signal for bond?
A reader was kind enough to note it is “Volcker”. My apologies to Paul!
Very interesting and insightful.
Thanks!
Great read. This needs to be seen by more people.
Lucid arricle dealing with a complex subject. It would be great if you could shed light on one of the great mysteries of our time and the genesis of the Fed's current actions. Why didnt inflation rear up in the past decade after GFC
I have heard explanations like globalism (outsourcing of manufacturing and pollution) and JIT supply chain operations and the deflationary effects of recession. Now that those phenomena are being reversed, in addition to QE, the Russia conflict, an oversupply of dollars and labor shortages, it makes for an inflationary environment
"The benefits of low rates has run dry." In order for there to be a benefit, wouldn't one need a truth oracle that is better than markets at pricing risk and time preference? Otherwise, wouldn't any manipulation of market rates would be more likely to result in increased malinvestment? If the argument is that the central banks are such oracles, does their prediction track record support that position?
The issue is that the connection between rates and inflation is very complicated, and under some market conditions could be inverse - meaning higher rates can lead to higher inflation. For example, look at rent. no one uses loans to pay rent, but almost everyone use loans to buy a house. Higher rates can lead to lower housing prices because of financing issues, which gives a signal to build less houses, which increases rents, which cause higher inflation.
Under current market conditions this is a real worry.
Yes, the only thing that's kept housing high is very tight supply. But as George Gammon has pointed out (in 3 fast, easy steps!) at some point higher rates will decrease demand and lead to price decreases in nominal terms, and much more in real (inflation adjusted) terms
I understand how higher rates would lower ability to pay for houses,not for rent. How demand would lower? some people would suddenly prefer no roof?
Where should one invest in such higher rate world?
If you're looking for income, maybe bonds or dividend stocks; back in the day if you had 8% interest and you could save a few hundred K you could live off the interest.
Incredibly interesting & insightful; 2 for 2! Thank you
I‘m reading this in chapters. It’s like a mini manuscript! I’m not all done yet, but I love it so far. It ads a lot of value to me, because it makes me think about things from a new angle. Your writing (and thus your thinking) is very clear. Thanks, Bear!
Great article. You do a fine job of illustrating why zero interest rates are harmful.
Just watch the spell checker: "all gas, no breaks. (brakes) and "Fast majority" (vast majority)
😁
Thanks for the article. What about a case for a higher inflation target? 4%?
Great article!
Some implications:
- Startups and companies that pretend to have a business model will have a tough road ahead as financing declines.
- "Real Estate prices always go up" will be tested.
- Real growth as denoted by forward earnings is still up, but the effects of monetary inflation will be amplified once/if it dries.
Tremendous piece. Looking forward to your next one.
I noticed plotting US10Y - US03M looks cyclical (same for EU). Lower bound:0% upper bound 3%. Do you think it could be used as a entry/exit signal for bond?
Great piece !! Thank you
Glad you enjoyed Weiss!