fed fighting inflation

[ragnarisapirate]

http://finance.yahoo.com/news/Official-Fed-will-need-to-apf-1511169380.html?x=0&sec=topStories&pos=main&asset=&ccode=

 

So, people are saying that rate hikes are gonna happen, and quite quickly, at that... What are your all's thoughts as to how this will potentially effect stocks?

 

For example, with higher interest rates, people will be able to afford less house, house prices could fall, which would effect the ability of banks to lend out money profitably. Specifically, it would hurt the previous loans that they had made at fixed rates.

 

If banks are 'buying' money at higher rates, then people may shy away from stocks.

[ERICOPOLY]

I don't think people will feel comfortable buying stocks on margin if the earnings yield is lower than their margin interest rate, and with higher interest rates I would think it would put the brakes on earnings for levered companies.  But one never knows  :)

 

[SharperDingaan]

 

Keep in mind that the Bank of Canada has 'suggested' that when they hike, they will be aggressive, & rapid; 75-100bp at a pop. End of party for equities.

 

SD

[scorpioncapital]

 

Keep in mind that the Bank of Canada has 'suggested' that when they hike, they will be aggressive, & rapid; 75-100bp at a pop. End of party for equities.

 

SD

 

Hmmm...2 years ago interest rates and inflation were much higher than 1 basis point and the market was significantly higher than today. I'm not sure your analysis of the end of equities is as clear as that.

 

 

[StubbleJumper]

Friedman argued that premature tightening caused the Great Depression.  Bernanke is a serious student of the causes and consequences of the Great Depression....I wonder if he holds the same view as Friedman?

 

The other way to think about this is the 9/11 way.  Do you keep rates low as a precautionary measure?  If the recovery has truly arrived and you fail to tighten, the adverse consequence would just be a little extra inflation.  On the other hand, if the recovery is a "false positive" and you mistakenly tighten, the result is a prolongation of misery. 

 

Which is the more serious error for a Fed Chair?

 

SJ

[bookie71]

A lot of folks got burned really bad with this latest downturn.  I suspect it will be quite some time before a lot of them reenter the stock market if ever.  I know several that went to cash at the bottom and that are still there.

[arbitragr]

A lot of folks got burned really bad with this latest downturn. I know several folks that went all in at the bottom and are still there.

 

[mpauls]

Who knows when we will be able to feel inflation  Though I don't think too much about this, I think the first signs will be felt in terms of imports.  Cost increases on products manufactured abroad and imported in combination with foreign monetary policy abroad will facilitate domestic inflation.  As the US increasingly becomes a smaller consumer as a percentage of world GDP, our effective bargaining power will decrease and prices will go up.  This could very well take many years (I guess, more then 5 less then 20).  Moreover, the treasury and fed can mitigate a large amount of what will otherwise be an oversupply of paper, by reducing the (arbitrary) capital they provided the banks.  I do not think this can be done in the very short term, but I'd 'bank' this is exactly where they will focus energy.  Good luck trying to guess, your better off dealing with this in other ways. 

 

 

[uncommonprofits]

 

Keep in mind that the Bank of Canada has 'suggested' that when they hike, they will be aggressive, & rapid; 75-100bp at a pop. End of party for equities.

 

SD

 

With the significant run-up in the Cndn dollar, the Bank of Canada is NOT worried at all about excess inflation ... in fact quite to the contrary.  Carney is actually concerned about getting back up to the inflation target of 1-3%.  A rapid series of significant interest rate increases is NOT in the cards unless we see some serious backing off of Cndn dollar strength. 

http://www.vancouversun.com/sports/Bank+Canada+Mark+Carney+worried+about+Canadian+dollar+strength/2043783/story.html

 

As for the situation in the States -- you may see some gradual rate increases but with rates remaining in a historically low range up until there is visible evidence of wage pressure.  Fact of the matter is the average citizen cannot afford any significant interest rate increases at the moment (and this becomes magnified by any rise in commodity prices and a new reality of putting away a little toward savings).  With the unemployment situation as it is -- any potential wage pressure would seem quite a long way off. 

 

In the mid-late 40's there was a couple big spikes of inflation .... interest rates rose, yet at the very low end of the historical range (something like LT bond rates rising from 2 up to 3%).    While many are relating this situation to the one in the 70's --- it could just as well work-out more like the 40's scenario.

 

UCP / DD

 

 

[SharperDingaan]

 

The market fantasy is that when the global rate increases start to happen, they will be sedate so as not to risk collapsing the stock bubble built on stimulus money. Yet a G8 central banker has just stated that policy matters, 2% inflation is the target, a powerful & sustained recovery has begun, he may need to act sooner vs later, & the efforts required of us (to control it) will be historic?

 

What do you think will happen to equity prices when the dominant media story from the "Great Recession" becomes the "Great Bear Trap" ? 

 

Direction and timing of rate increases. The three R's

http://www.bankofcanada.ca/en/speeches/2009/sp280909.html

“ the Bank's judgment that our policy rate should remain at 1/4 per cent at least through the end of June of next year in order to achieve our 2 per cent inflation target. This conditional commitment does not indicate what will happen following the end of the second quarter of 2010, …. it is an expectation, not a promise.”  ... “To conclude, one lesson should be clear: policy matters.  A powerful and sustained restructuring of the global economy has begun. Canada is entering this period with many strengths, but the efforts required of us will be historic. As I have reaffirmed, our principal contribution will be to consistently achieve our inflation target, so Canadians can plan and invest with confidence. “

 

Potential magnitude of those rate increases

http://www.canada.com/story_print.html?id=1976736&sponsor=

 

SD

[Guest Broxburnboy]

 

The market fantasy is that when the global rate increases start to happen, they will be sedate so as not to risk collapsing the stock bubble built on stimulus money. Yet a G8 central banker has just stated that policy matters, 2% inflation is the target, a powerful & sustained recovery has begun, he may need to act sooner vs later, & the efforts required of us (to control it) will be historic?

 

What do you think will happen to equity prices when the dominant media story from the "Great Recession" becomes the "Great Bear Trap" ? 

 

Direction and timing of rate increases. The three R's

http://www.bankofcanada.ca/en/speeches/2009/sp280909.html

“ the Bank's judgment that our policy rate should remain at 1/4 per cent at least through the end of June of next year in order to achieve our 2 per cent inflation target. This conditional commitment does not indicate what will happen following the end of the second quarter of 2010, …. it is an expectation, not a promise.”  ... “To conclude, one lesson should be clear: policy matters.  A powerful and sustained restructuring of the global economy has begun. Canada is entering this period with many strengths, but the efforts required of us will be historic. As I have reaffirmed, our principal contribution will be to consistently achieve our inflation target, so Canadians can plan and invest with confidence. “

 

Potential magnitude of those rate increases

http://www.canada.com/story_print.html?id=1976736&sponsor=

 

SD

 

Personally, I believe that interest rates could rise sharply in this manner, but the level of outstanding debt will have to be reduced first, otherwise higher interest rates will only throw the economy (particularly the housing sector) back into freefall. Implicit in this scenario will be the stiffing of all long term fixed return bondholders as the price of "secure" low interest bond prices fall dramatically. If on the other hand the debts were reduced by massive monetary inflation first, then the necessary rise in interest rates could begin.

 

The last time we saw these interest jumps in the late 70's-early 80's mortgage rates got to 23% (briefly) the consumer was hammered, and unemployment rose... the price for reigning in inflation. This scenario can only be implemented in a environment where the economy can withstand the medicine and relies on the current, much ballyhooed, "recovery" being real and sustainable.

[Viking]

I just finished re-reading the Van Hoisington Q2 report. I believe their crystal ball is closer to what we will see in the near term - deflation will re-emerge as the dominant concern for the next few years.

 

[ftp=ftp://www.hoisingtonmgt.com/pdf/HIM2009Q2NP.pdf]www.hoisingtonmgt.com/pdf/HIM2009Q2NP.pdf[/ftp]

[SharperDingaan]

 

Viking: Keep in mind that the 'wise' man in a mania is the one with the story that nobody wanted to hear, & that these statements are coming from a G8 central banker who cut his teeth at Goldman Sachs.

 

May we all enjoy the ride,

& put a hedge on a 1/2 hour before the devil knows we've covered  :-*

 

SD

 

   

[Guest Broxburnboy]

 

Viking: Keep in mind that the 'wise' man in a mania is the one with the story that nobody wanted to hear, & that these statements are coming from a G8 central banker who cut his teeth at Goldman Sachs.

 

 

 

Agreed... it's probably more reliable to listen to those economists who saw the credit crunch coming. Here is one such forecast:

 

http://www.hussmanfunds.com/wmc/wmc090928.htm

 

Cheers

[SmallCap]

In addition to looking at this question from an economic point of view and what the market will cause to happen I have been trying to look at this question from a political perspective. In other words, what do politicians want and what will keep them elected.

 

my conclusion is that politicians would drastically prefer inflation rather then deflation and so they will do whatever they can to produce that effect (I am not saying that they can truly control it).

 

If we have a moderate amount of inflation (not Hyper) then theoretically our houses would increase in value and the debt load on those houses would be easier to pay off, meaning that fewer people would default. Also all of the debt both personal and governmental would be easier to pay off.

 

now I realise that this is only part of the equastion and the market has a lot more to say about what direction we go in then the polotions do. I also know that this is a rather simplistic view that doesn't take into account some of the other consequenses that would come about. but we are talking about polotionions here and they like the quick fix. and from their perspective the worst thing that could happen is serious deflation.

 

Can someone poke some holes in this thinking?

 

SmallCap

 

 

[bookie71]

"If we have a moderate amount of inflation (not Hyper) then theoretically our houses would increase in value and the debt load on those houses would be easier to pay off, meaning that fewer people would default. Also all of the debt both personal and governmental would be easier to pay off."

.

.

But, don't forget that you have a surge of "Boomers" going on fixed incomes and that will make it harder to pay off, especially if they have large amounts of consumer debt.

 

 

[ERICOPOLY]

"If we have a moderate amount of inflation (not Hyper) then theoretically our houses would increase in value and the debt load on those houses would be easier to pay off, meaning that fewer people would default. Also all of the debt both personal and governmental would be easier to pay off."

.

.

But, don't forget that you have a surge of "Boomers" going on fixed incomes and that will make it harder to pay off, especially if they have large amounts of consumer debt.

 

 

 

I doubt too many of them have fixed incomes of any meaningful size outside of Social Security, which is indexed to the CPI-U.

[SharperDingaan]

 

"Can someone poke some holes in this thinking? "

 

Nothing wrong with it - it's the conclusion that's disturbing.

 

When the US sees itself only in isolation, has a demonstrated xenophobic bias (1940's 'isolationism', colour barrier, etc), & the vast majority of the population never travels outside of the US, the obvious solution is to deliberatly inflate. Asset values rise, home-owners have ATM 'equity' to spend again, US employment rises (USD devaluation made foreign goods too expensive), the troops come home (& stay home) & any politician citing 'buy America' has a very easy sell getting re-elected. Nirvana.

 

But don't ever refer to the US as the NA 'banana republic', mention the cultural revolution taking place, or use the FX rate as a 'proxy' for US 'influence'.

 

SD

 

   

 

 

[Guest Broxburnboy]

Who knows when we will be able to feel inflation  Though I don't think too much about this, I think the first signs will be felt in terms of imports.    

 

The fact is that we have been in an inflationary environment for decades.. everything from the price of bananas to housing has inflated at a more or less constant rate, and we have become used to the premise that prices always rise, but so do profits, wages and other income.

Monetary inflation is not a bad thing if the rate of inflation is manageable (i.e. incomes rise as quickly or quicker than prices) and the new money creates wealth (positive cash flow at all levels, from household to government). Where there is more or less economic freedom and a level playing field, prosperity will be shared throughout the society.

If the new credit created is malinvested in asset bubbles, foreign wars, overconsumption (consumer spending reflected in chronic negative balance of trade), then wealth is destroyed. Central banks are attempting forestall this wealth destruction simply by advancing more credit through artificially low interest rates (when interest rates are below the level of price inflation, the central banks are absorbing the loss).

This is called monetary policy, previously used to "fine tune" the rate of inflation in an economy, but in the Greenspan era, now used as a subsidy to the financial industry, to avoid having to book real losses, and to government to finance deficit spending. Those losses are thus partially absorbed through monetary inflation, others are realized through bankruptcy and the bulk (we surmise) are still sitting on bank balance sheets as unrealized (frozen, troubled or toxic assets).

The idea is that these actions have bought some time for the economy to "recover", cash to start flowing, asset prices to rise to the point that the unrealized losses in "frozen assets" never have to be realized. The banks will "earn" their way out of their previous malinvestments. The purchasing power of the USD must fall as the result of monetary inflation on a negative growth economy and prices will rise faster than incomes (this price inflation will punish those at the bottom of the pyramid relatively more than those further up). The end result of this monetary inflation will be the dillution in purchasing power that is necessary to keep asset prices stable and eventually to subsidize consumers to keep them solvent (and their debt obligations current).

The intent by governments to further run deficits and direct subsidies are signalling that the purchasing power of the USD will continue to erode until the economy reverses. Asset prices (homes, stocks, CRE) will continued to be supported at the expense of the buck.

We may have sudden downward pressure on the dollar, if the US runs out of cheap credit to finance the dillution... this may be imminent.

On the other hand, the economic "green shoots" seen by some may drive corporate earnings, consumer spending and government tax revenues to a new era of prosperity.

 

 

[mpauls]

In response to the above post.

 

Indeed we have experienced inflation for well over 100 years.  If I failed to acknowledge this, I acknowledge this.  It's the above "normal" rates of inflation that I was referring to as "inflation."  Bananas and houses are both commodities, which as I see it will not be the source of our felt problems.  (Also I would be surprised if Bananas have kept pace with housing prices.  I looked at housing increases a few years ago, and if I recall correctly, housing has increased by about 6.5 % over the last 35+ years.  That is until 2004 or so. 

 

Income increases lag price increases.  ... something came up, can't finish now. will add later.

[beerbaron]

In Canada, Aug 2008 to Aug 2009 inflationary rate without energy was about 1.4%. That is a big number considering we were in a huge crisis. So if there is still a price pressure upward when we are in such a mess what is it going to be when the recovery/stimulus package get traction?

 

Some would argue that the price increase occurred because of a lag between gas prices and other commodities. I will give you that, but now after a year, if the prices don't start to stag for the next 6 months that would mean that there is other forces around. Inflation is not just the result of the local monetary policy.

 

BeerBaron

[uncommonprofits]

In Canada, Aug 2008 to Aug 2009 inflationary rate without energy was about 1.4%. That is a big number considering we were in a huge crisis. So if there is still a price pressure upward when we are in such a mess what is it going to be when the recovery/stimulus package get traction?

 

Some would argue that the price increase occurred because of a lag between gas prices and other commodities. I will give you that, but now after a year, if the prices don't start to stag for the next 6 months that would mean that there is other forces around. Inflation is not just the result of the local monetary policy.

 

BeerBaron

 

The Canadian dollar was in free fall up until March.  The lag involved with this would also have something to do with the slight inflationary pressure.  Also, Canada weathered this storm better than many countries ..... the crisis not so deep (in some cases some significant wage increases amongst the havoc). 

 

But the Cndn dollar situation has of course reversed itself with significant strength.  Again, read Carney's last statement ..... with the Cndn dollar's strength, the BOC is not worried at this point about too much inflation.  Quite to the contrary --- they are worried about getting UP to their inflation target range (1-3%).  Unless we see the Cndn dollar back off significantly -- we would seem to have a lot less to worry about when it comes to inflation.  But, on the otherhand ... if this dollar strength persists we might worry about a more severe recession in Canada down the road. 

 

UCP / DD

[mpauls]

... to continue...

 

In order to deal appropriately with not only inflation, but also of the general standing 10-20 years out we must address several problems within short duration, not just one or two.  The current financial fiasco was was caused by problems known well in advance.  The real mistake was ultimately that these known future problems were simply ignored.  They could have been addressed and at only minor inconvenience to a small proportion of individuals. 

 

I fear that we might be making the same mistake again in light of our current circumstances.   

 

Ideally if we were able to get expenditures under control we could avoid increasing taxes.  However given we are still at war, will implement stimulus over the next few years, definite issues in health care subsidization, and aging population on the brink of social security, etc., an increasing pile of interest on national debt held abroad it does not appear as though this is possible in the near-mid term.  Moreover we will as long as we buy gasoline have a negative trade balance. 

 

So it would appear as though the only option is to change the tax policy.  But that brings us back to the fact that we are still suffering and are far from being clear of the current mess, which makes increasing taxes unlikely and if not now then when? 

 

and the cycle continues.

 

Also we must consider changes in:

 

Regulation

Financial Regulation (systemic risk & whether to limit banks to banking)

Corporate Internal Regulation (directors & corporate governance)

 

&

 

Trust in Government (Anything beyond skepticism bad)

Lobbyists

lack of sensible discussions/debate

poor job by media

 

 

 

 

[mpauls]

I apologize for getting sloppy at the end there, I'm just strapped for time right now.

[ERICOPOLY]

I went to Walmart yesterday. 

 

A six pack of Heineken was $6.99.  I don't think it has changed in price since I was graduating high school in 1991.  In fact, I think it is cheaper now than it was then.

 

When consumer prices are calculated, where do they go to shop for prices?  Do they go to Walmart or do they go to the mall?