changegonnacome

Genuine goods news on how inflation gets fixed - that doesn't involve tanking the economy & jobs market I'm not saying its enough - but surprises to the upside on productivity growth is what we need. Democrats and Republicans doing comprehensive immigration reform in Q1 2023 would also be another.......I included that wish however in my letter to Santa

Inflation left unchecked in some respects will indeed burn itself out.......because spending/incomes having been hurt by diminished purchasing power will induce recession type consumer behavior - increased savings, lower nominal spending growth, rising unemployment which left to play out will indeed stabilize prices....problem here is a dimwitted Central Bank trying to 'help' then stimulates too early and starts the whole inflationary cycle off again which is what happened in the 70's and to some extent is what you would expect a dimwitted Fed to do in 2023 once the pressure mounts to 'rescue' the economy/politicians....look at the calls already to 'pivot' & look at the macro-conditions driving those calls......SPY is off only 16% YTD, unemployment hasn't budged an inch & at records lows & the economy has slowed but is still growing....imagine the squeals in 23 with unemployment inching towards 5%, SPY off 30%, economy/companies printing negative numbers...it aint easy being a Central Banker once your predecessors have used up all the easy choices on you.....JP curses Greenspan, Bernanke, Yellen every day....they got to be heroes, he has to be a villain (or does he?? )..........but back on the point - the difference between this option (non-intervention) and Fed tightening...is kind of the difference between knowingly letting a random bomb go off in Times Sq. or having a controlled explosion of a discovered device. One is chaos, the other is prudence.

Think the point being made is a simple one.....in a fiat currency system, where confidence in your monetary regime is key...... you pick an inflation target that is low enough to be imperceptible to the population & of little concern for those making forward investment decisions in any 12-24 month period......2 is a good number, so would 2.5, so would 1.5%. However the whole point of having a target like that is to STICK to it & more importantly hit it so you can demonstrate some level of competence at the monetary authority level........and this is why this debate is so stupid......to move the inflation target now when your missing it.....is to admit you are no longer fully in control of your monetary regime......and when your monetary regime is backed by nothing but the confidence in it.....well you can see how retarded this type of talk is.....but its exactly what you would expect at this point in a tightening cycle.......lets call it a version of the.....no pain, all gain workout dream......the 6 minutes ab infomercial......the "is there not any easier/shortcut way to do this that involves no work and no sacrifice" idea.....have your cake and eat too thinking.

Doubly so I might add that a low 2% inflation target is the 'right' number in a 'mature' economy like the USA where real growth at best is perhaps 2ish%........this is an economy where its days of big YoY productivity & output growth are well behind it. I think we all accept that a good/exceptional outcome for the USA would be to have its economy grow perhaps 3-ish%....reality is more 2ish......this type of growth would be exceptional for a country this developed, this size and this technologically advanced. Well you take that 2-3ish%.....you've 1-2% real growth and 2% nominal growth and its about right.....I personally think of a country's inflation target as being actually constrained by your underlying real output/growth ability. Its less of a choice and more an acceptance around the reality of where you are in your economic development cycle. An emerging economy - one where large productivity and output gains in a single year could be 8-10%.......well you've got a little more latitude inside there to run inflation hotter. Why? Simple - the pizza pie is getting bigger, so much quicker, because your making such large strides in growing real output & by extension real incomes. Infrastructure, P&E investments in these economy's have high incremental marginal output returns you can take a little higher inflation as there is less harm being done by inflation destroying incomes, cause incomes are growing so much faster in real terms.....the problem as I've talked about before in my USA Widget World Inc examples earlier in the thread......is that this is not the case here.....the pie (output) is growing slowly, much slower than nominal income/spending is right now hence why we have inflation.....so changing the amount of money moving around doesn't change the amount pizza to be eaten....it simply changes the quoted price per slice while hurting those most unable to bargain for nominal pay increases to maintain their purchasing power or their share of the pie. In this respect one can think of an economy & its monetary base.... a little like a stock split....which everybody here gets implicitly I think....issuing more stock doesn't change the underlying aggregate economic value being created by an enterprise....it simply divides it up into smaller chunks/claim checks, there is no extra pizza, only extra claim checks on the pizza....well an economy is no different its REAL aggregate output that matters most....you can increase nominal income all you want with 8-10% pay increases........but its chasing the same number of REAL domestic goods/services.

It’s not a target if you keep changing it when the going gets tough……talking about changing it upwards at some point in the future is a worthy debate…….but doing so now is just not the time IMO….show resolve, get back to 2-ish, hold it there for a year or two THEN have the debate ….anyway think about what a 2.5% target rate would do to long duration treasuries…I mean if you want to help stonks go up it just immediately wouldn’t be a good for them as 10/30yr would shift upwards incorporating higher ‘acceptable’ inflation

It’s one thing to change the target rate in the context of achieving said target…….quite another to change it when you’ve failed so objectively at your stated aim…..if you think Central Bank credibility matters in a fiat currency system ( and I do) then it’s not quite as simple as it might seem to change the goalposts

https://www.reuters.com/markets/us/us-job-growth-beats-expectations-unemployment-rate-steady-37-2022-12-02/ That god damn labor market just wont crack.........and without it cracking in some meaningful way you're just not IMO going to get reductions in the level of aggregate spending growth needed to bring prices back into alignment with current maximum aggregate output + expected 2023 productivity growth of sub-2%. The delta between those number (2% productivity growth against maybe ~6-8% nominal spending growth in 2023) is just too big not to have an inflation number with easily a 4-handle, maybe 5-handle in front of it for much of 2023. We've got some easy YoY mathematically certain falls in inflation coming (goods/energy).....the journey from 8% down to 5% is a cake walk for the Fed and markets just die-ing to proclaim inflation 'fixed'.......the journey as I've said for many months now from 5% to 2.5% is gonna be a bitch. I mean the counter argument to why the labor market and by extension the economy doesn't need to crack this time to fix inflation is that somehow a reduction in the level of job openings alone, noticed by current or prospective employees would be enough to instill recession like spending behavior i.e. cutting spending, increasing savings....for that famous rainy day. Of course I've spoke about the paradox of thrift here before which is really how people by saving for that rainy day, actually make it rain but thats another story. But back to my point above.........how many times have you heard your significant other come home and say "hey honey, I noticed the jobs available section in the newspaper is looking a little thin lately, I think this year we'll stay at your cousins house on the Jersey Shore instead of that cool W Hotel, best to just pull in the spending a bit so were in good shape & lets hang on to F150 another year, its a great car I love it we dont need a new one"........basically........never..... What I just described above by the way is the soft landing scenario that J-P & others seem to be dreaming off, funny uh?........but this type of 'pulling the horns in' conversation is the one the Fed is currently trying to engineer to moderate spending/income growth & stabilize prices.......we all know the real conversation that actually triggers the required mindset/behavior......& its this one........"hey honey, my friend Jeanie's husband just got let go, they were doing great, better than us, now theyre not so sure they can keep their second car Jeanie is wondering if we'd like to buy it?......honey I was thinking that maybe we'll tighten things up for a while, cancel that vacay & do a staycay and if there's any extra shifts going you should take them and eh we should have your boss Tom over for dinner in the next couple of weeks, OK?" Thats the conversation that shrinks nominal spending growth and boosts productivity and kills inflation.......not job openings getting a little light on indeed.com or whatever. Anyway enough ramblings - I remain firmly & deeply skeptical of both this rally and that the bottoms reached in 2022 represent the lows that signal we have moved back into a new expansionary period for the economy/markets. I say this not to say sell everything & go hide under a mattress......I say this to say that this is not a time IMO to be aggressive, I say this to say that one might hold little more cash than normal in anticipation of higher return options in the future that it would justify the opportunity cost of holding said cash, I say this to say that one should demand a little higher expected FCF returns with higher confidence intervals on the FCF showing up than one might normally demand from a security. I say this to say that one might choose a security where only a few things need only go right for the investment to succeed rather than one that requires a lot to go right. This is what I'm saying.

Not a REIT guy - but this strikes me as a very very important insight.....that as @Gregmal points out gives you an edge versus Brad, Chad & Tad doing excel backflips eating their Sweetgreen salads in their cubicles waiting for their boss to leave so they can go home

I think they are determined and have learned the history lesson that you cant back off at the first sign of inflation coming down.........that you need to preserve longer than you would like to and see it through beyond any reasonable doubt.....because if you don't you'll have to go back again and do a tightening cycle all over.....causing more aggregate pain to get to the same end point......J-P talks a good game on this.....hope he backs it up.

Yep I agree - my bearish-ness isnt some cassandra complex.....its I want these same things that you and I agree on at even lower prices than today......I'm greedy, very greedy........and just feel there is a one more leg down left before inflation is truly 'fixed' and the moment of maximum opportunity is when genuine weakness shows up in the economy, in unemployment numbers and the Fed sits on its hands and doesnt stimulate as it has done for the last 40yrs....I kind of call it the....."somebody should do something" moment.....it'll be around the time when the folks on CNBC are screaming that the Fed needs to step in to help the markets/economy, that this is crazy.....& the Fed doesnt step in....because their job right now is to actually stand back and allow weakness to permeate the economy such that inflation gets dead and buried. Like you have to admit the madness right now out there in the media - around a Fed pivot with CPE at 6%+ and the economy with historically unprecedented low unemployment number & job openings. Its delusional.

Fair enough.....but it sure doesn't feel like this market is priced as if everyone is bear-ish and convinced inflation is a problem and were heading for a recession to fix it.......it feels like the opposite and IMO is priced, at indices level at least, feels like the Fed has pulled off the unimaginable........a soft landing.....inflation is definitely transitory THIS time for SURE Yep the market agrees with you.

But isnt the market indices (the crowd), at its current multiple of earnings, assuming inflation is effectively fixed and is coming down in a kind of predictable slope in the next 6-12 months with rate cuts in there too and it will ALL happen without a recession in between effecting SPY earnings? Isn't that what the crowd is saying and what the current market multiple suggests? The much fabled soft landing? I'm just curious. On days like today I certainly dont feel like part of the crowd as QQQ rallies 6%......and SPY rallies 3%......I feel quite contrarian with lots of red ink to prove it! I thought its meant to feel comfortable in the crowd at least

Didn't have any comment on educational inflation figures....I have no idea, havent looked - i was simply pointing out the various misc. things that fall in this services (ex-home services) inflation bucket.....and how these items are the next leg of inflation.....the category that, ya know, isn't mathematically guaranteed to come down like energy/supply chain is.

Short term intra-day macro is a fool game.....I agree...but a little longer term view lets call a view which sits 6-12 months out there is an opportunity in marco.....an opportunity to hedge, an opportunity to build dry powder....in truth I dont think its that long away H1 2023 is really going to be so interesting....what this move shows, relative to what J-P said today, is how Pavlovian the 'Fed put' psyche has permeated the markets......which also tells you how badly the markets might/will break when that assumption evaporates in face of actual evidence........the last couple of months have been characterized by, without almost any evidence, that somehow the Fed pivot was coming soon..........IMO a 2023 Fed pivot is priced in........whats not priced in is that there will be no pivot by the Fed in 2023 as the economy + unemployment rolls over & folks begin to squeal in pain. Let's see. I was glad to see him speak about the where the problem is moving forward which is services (ex-home)......or as I've been banging on about domestically produced goods and services sector.........every other category will come down with predictability & is a mathematical certainty.....this important sub-catergory (50% of core PCE)....speaks to an economy operating at the pin of its collar to produce what it currently can....and all increased wages will do is move the quoted prices of these finite goods and services upwards, it wont change the actual amount of goods/services being produced one iota (beyond measly productivity gains)

One thing thats consistent with my thoughts is Jay-P is very focused on is Services (ex-home services) which is 50% of core PCE.....this is exactly what I speak about and where the problem is....everything else is coming down as we know everything that comes on shipping containers and tanker......these are haircuts, educations services for example & lots of other things but things that are domestically produced in nature and ultimately constrained by labor availability......and as he said today the scale of wages increases today are not consistent with inflation moderating back to 2% by itself. "Finally, we come to core services other than housing. This spending category covers a wide range of services from health care and education to haircuts and hospitality. This is the largest of our three categories, constituting more than half of the core PCE index. Thus, this may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category. In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.3 Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market. Signs of elevated labor market tightness emerged suddenly in mid-2021. The unemployment rate at the time was much higher than the 3.5 percent that had prevailed without major signs of tightness before the pandemic. Employment was still millions below its level on the eve of the pandemic. Looking back, we can see that a significant and persistent labor supply shortfall opened up during the pandemic—a shortfall that appears unlikely to fully close anytime soon."

He's wearing his light blue tie today......everybody knows what that means.......SPY 3000 is now a cert

Yeah i appreciate your pushback..always......being bullish is the correct posture like 80% of the times....which means probabilistically one should just be bullish by default always..........& I want to get aggressive.....i want to be greedy.....but we aint done with this yet......as Bridgewater report i linked too points out.....equity markets in an inflation/raising rates cycle dont really bottom until at least unemployment starts to crack and we just haven't really had anything close to a crack.....which makes sense rates act with a lag....9-12 months....we are only now starting to feel the raising rates earlier this year about now....H1 2023 is gonna be a doozy.......folks will be running for the exits then.....I'll be rushing past them

Right.......and this is not an issue in an economy growing domestic goods and services output by 8.7% per year or even 6.7%.....8.7%-6.7% = 2% inflation....fine thats what we want.............the issue is that this an economy with NO workers on the sidelines ready to be hired off the couch, no obvious productivity enhancing P&E investments that haven't already been made in the last decade...........increases in domestic goods and services output can only come from grinding out modest productivity gains lets call optimistically 2% a year.........but your dumping ~8% nominal pay increases into this economy.......as I've said nominal pay increases by themselves do NOT produce MORE domestic goods and services, they simply increase the quoted price of those domestic goods and services i.e. inflation.

Enough Spinal Tap - how about Prince....Dalio & Bob Prince that is: https://www.bridgewater.com/research-and-insights/how-conditions-today-compare-to-past-equity-market-bottoms Cliff notes....is bottom here? - very little chance it is

Maybe I'm too macro.....but your way too micro But also enjoy the chats. But seriously you do need to think about a nation, in a fiat currency system, and aggregate upwards to think of it like a single conglomerate that produces goods and services.........and then consumes them......with money intermediating all those micro transactions.......my point is a simple one and not academic at all....its about as common sense as it comes......you only get to consume what you produce.....increasing the bits of paper moving around your economy doesn't change what you consume....it just changes the quoted prices of those goods and services. This remind of me of Spinal Tap....."your at 10, like where do you go........well you just go to 11......." I'm saying the machine have been left on as long as they can be.......as Mr.Plastic Spoon baron cant get anymore more workers to staff a third shift to watch the machines. He's operating at 10. Airlines.......well you walked into this one........you see all the disruptions at the airports this summer?......not enough ground crew.......not enough air crew.........not enough pilots.....just not ENOUGH people to deliver the extra flights or even the flights they had scheduled. I guess what your saying is that US business just needs to buy amps that go up to 11.....which is one more than 10

SPY OTM Calls (4400) June 2023 Expiry

Again your focused on what caused inflation to start and using it as the benchmark by which it wont continue.....your completely misdiagnosing the problem......but to get specific to your point about the benign-ness or harmlessness of an economy systematically giving itself unusually large pay increases across all sectors and industries for a year or two (in response to historical inflation flare) .....this is where your completely wrong and I don't think have fully got the point I've explained a couple of times in this thread........you only get to consume what you produce as a nation......nominal pay increases do NOT produce MORE goods and services......and in an economy operating at its full productive capacity which I thnk we both agree on, but correct if I'm wrong?.....those nominal pay increases dont show up as incremental goods and services, those nominal pay increases show up as inflation. (Important Aside & important point - nominal pay increases may allow to consume more Korean flat screen TV's & imports if the currency plays ball at the same time) Put simply tell me that the US domestically will in 2023 produce 10% more goods and services than it did in 2022.......and that nominal spending in 2023 will increase 12% over 2022........and I'll tell you that inflation will be about 2%. Great result. Good result. The problem is the USA will not produce 10% more goods and services next year......its operating at full employment, its has horrible productivity growth, its at full employment or beyond......increases in goods and services next year will only come from productivity gains....which have been lousy lets call them 2%.....but what certainly seems to be happening for next year is the following just based on my own scuttlebut research - blue collar workers are getting 6-8% increases, grey collars are getting 7-10% & white collars are getting 10%+.........lets average it all out at 8%. No big deal, right? Well it is a big deal.....I just told you that the US will produce only 2% more goods and services next year over 2022........and I also just told you that nominal income & its flip-side spending is going to increase by 8%.......sounds like Milton Friedmen's defintion of inflation.....too much money money chasing too few goods and services = inflation. Thats why pay increases are a problem......they arent a problem when those pay increases are being met by equally large increases in the productive capacity of your economy such that your supplying incrementally more goods and service to meet these increases in nominal income/spending. Thats called an economic boom and an economy on the march.....but that isn't whats happening here.....the labor force isn't growing (if anything its shrinking), a large capital cycle of modernizing industries isn't happening such that great productivity gains are being achieved by American manufactures as they upgrade their P&E to modern manufacturing methods....the USA isn't Kazakhstan.....we've had 15 years of ZIRP any easy productivity enhancing gains via P&E investments have been made years ago. There is no incremental leap coming in the aggregate productive capacity of the USA.....its a slow grind upwards.....2% a year......you can give yourself pay increases of 8% all you want.....it dont mean jack.....cause your wife cant serve nominal pay increases for dinner.....she wants meat and potatoes from the store

In some ways it doesnt matter how we got here (COVID, china, supply chains, war). What matters is where we are & where we are is two full years dominated by persistently higher inflation that informs & permeates the conversation of most get togethers I go too. The thesis therefore is inflation once it flares up and remains high for a descent period (say like TWO full years like the anniversary we are about to hit in April 2023) has horrible habit of replicating & self-reinforcing as past inflation gets built into future wage agreements. See various wage agreements struck in the last number of months and anecdotally everyone i speak too around their 2023 salary. So whats the problem with pay increases I hear you say? Its not a problem in an economy with slack that can grow its productive capacity. But thats not we have in the USA. The problem is exactly what you and I @Gregmal do agree on fully & absolutely....... that this is a super strong economy with lots of employment opportunity & jobs...too many in fact......but you see this is the problem.........an economy operating at FULL tilt (max productive capacity) with low productivity growth like we have.....cannot give itself nominal pay increases & hope to end up better off........what actually happens is you end up with inflation & societal instability....cause you cant eat nominal pay increases, you only get to eat what you produce......& USA Inc. is producing (domestically) everything it possibly can.....USA Inc. is running three shifts, 365 days a year.....its enticed every lay-about it can off the couch (with disastrous results for incremental marginal productivity).....but its unable to supply anymore incremental goods or services above and beyond what can be delivered by innovation/technological advancements & productivity gains......the issue then is the increase in nominal income/spending (achieved through pay increases) is exceeding domestic productive capacity....the difference between those two numbers shows up as inflation......as I said many pages back.....the inflation story if you havent noticed has morphed from things that were put on international shipping containers & oil tankers to things that aren't....like services/domestic food etc.....this is the inflation problem now.....homegrown and Made in the USA......domestic productive capacity of domestic goods and services is maxed out.....that productive ceiling limit is being met by nominal income/spending increases delivered via wage increases......but this is just paper money....people dont consume paper.....they consume goods and services using paper money.....more paper doesnt create more goods and services.....it simply increases the nominal price of those goods and services.

This is all true and something i expect. The real shocker for 'the market' thats coming...& the moment of peak fear & the one I'm preparing for as buying opportunity of epic proportions.......will be the point where Fed pivot dream collapses..............this will be when the unemployment is rising towards 5% and US is printing recession numbers.......yet the Fed doesnt stimulate, it doesnt cut rates as it has for 40 years...............it simply does NOTHING............ and holds the line at 5% Fed funds and waits and watches for inflation to moderate to 2.x% The 40-year Fed 'put' still characterizes this market & its multiple.....the Pavlovian response is deeply in-grained in participants......Economy weakening/SPY down 30% = Fed stimulus = market rally....when that doesn't happen it will be quite shocking to people who have only known this world. Panic and 'get me out' at any price will kick in. Let me be clear however - I'm giving Jay-P & Co credit for something they are yet to do......which is to show true grit & courage....which is to hold steadfast against a weakening economy/higher unemployment.....& to become so deeply unpopular that they will actually become hated by the right, the left, the centre...the president and the congress.....but do it anyway....because they know its the right thing to do........in the pursuit of the greater good which will be returning price stability. Bridgewater is less optimistic.......their base case is the Fed chickens out and starts cutting rates too early to fix inflation.......and we get the worst of all worlds which is stagflation. Lets see.

Yep I agree.......look at UK........nurses, rail workers, london underground.......all going on strike......the de-unionization of the past 40 years is whats saving the US economy from a winter of discontent like they are having in England........but re-unionization, as seen in Starbucks/Apple Stores & as you mentioned, is step one in a two step process where collective bargaining really starts kicking things off and in my view in-graining inflationary pressures further into the economy....you bring Union's back to life you bring inflation back to life.......another good reason why the Fed must remain steadfast in 2023 as unemployment & economy begin to feel the burn of higher rates.....they get one more shot at this to turn this COVID inflation flare into a short-ish 3 year "blip" (April 2021 - Q1 2024) if they miss this window.....it could be a decade long affair ala the 70's..........they've got to really hold the economies head under the water in 2023 IMO. Lets see....the book says central bankers chicken out always and kick the can.......stagflation is my case as a result.