Fed can't keep the rates low

[fareastwarriors]

This research paper claims in the Weimar Republic Hyperinflation started with a huge runup in stocks and increase in speculation.

 

Might I recommend more reading about the end of World War I....

 

This is a good read:

https://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941/ref=sr_1_1?crid=27Q49J0PE9LSP&dchild=1&keywords=when+money+dies&qid=1614199756&sprefix=When+money+dies%2Caps%2C176&sr=8-1

 

In my view, there are three reasons why hyperinflation might happen:

1) losing monetary sovereignty (ie, central govt must float debt in foreign currency that it cannot issue by fiat)

2) war - or - a government overthrow

3) the collapse of domestic industrial production.

 

After WWI, Weimar Germany suffered all three.  Next - do the United States Federal government....

 

I don't know anything about Bitcoin, so I can't comment - though I fail to understand why a supposed monetary polaris would be so unstable in value.

 

wabuffo

 

I am currently reading the book Studies in Hyperinflation and Stabilization http://www.centerforfinancialstability.org/hyperinflation.php which is a collection of oldish papers examining different hyperinflations which have happened through time. The first lesson they state (page xxii) is that "We, like others, have identified the cause of hyperinflation as the substitution of [money creation] for the tax financing of government expenditures" (i.e. when instead of raising taxes to finance government spending the central bank just prints).

 

Now not wanting to dive into politics too much, but I think its safe to say in the US/Canada at this point there is very little appetite for the type of tax increases that would be necessary to fund the type of deficits of the past year, and are expected for the coming years. As well, the politically easy type of taxes that may be implemented (i.e. wealth taxes, tax on high income earners) will not end up generating that much revenue. With this in mind it is very easy to imagine a high inflation scenario (maybe not hyperinflation, but higher than most of us would have experienced in our lifetimes) over the next decade or so, the government keeps printing because it is the easy thing to do.

 

Seems like to me, there is major room for improvement to collect What is currently Owed without even changing rates or adding more taxes:

 

 

One of the IRS’s key responsibilities is to ensure that taxpayers comply with the tax law. If the IRS can increase the rates of voluntary compliance, it can reduce the Tax Gap. The Tax Gap is defined as the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely pay for a tax year. The gross Tax Gap, which is the amount that is owed by taxpayers before collections from IRS enforcement actions and other late taxpayer payments taken into account, is estimated to be $458 billion annually. The underreporting of income taxes comprises the largest component of the Tax Gap at $387 billion annually, with amounts attributable to nonfiling and nonpayment of taxes at $32 billion and $39 billion respectively.

 

There are a number of different factors that drive voluntary tax compliance. The

IRS estimates that information reporting and withholding requirements are significant drivers of tax compliance. For instance, when there is information reporting and withholding at the source, tax compliance is approximately 99 percent. When there is information reporting, tax compliance is approximately 93 percent. When there is neither withholding nor information reporting, the IRS believes tax compliance is as low as 37 percent.

 

https://www.treasury.gov/tigta/congress/congress_09262019.pdf

 

 

In fiscal year 2020, the government’s net outlays for interest totaled $345 billion, equal to 1.6 percent of gross domestic product (GDP) and accounting for 5.3 percent of total spending.

 

https://www.cbo.gov/publication/56910#_idTextAnchor001

 

[wabuffo]

Bill Dudley is the only Fed (or former Fed) talking head worth listening to, IMHO.  He talks about some important plumbing issues that are coming this spring/summer for the US monetary system.

 

https://www.bloomberg.com/opinion/articles/2021-02-25/negative-interest-rates-could-be-trouble-unless-fed-acts?

...the US Treasury has built up a huge cash balance at the Fed -- currently about $1.6 trillion.  Also back in August, 2019, Congress suspended the federal debt ceiling for two years -- and has stipulated that when the ceiling comes back into effect on August 1, Treasury should be holding no more than about $120 billion in cash. 

 

So to meet the Congressional requirement, Treasury will have to draw down its cash balance at the Fed.  Combined with the $120 billion a month that the central bank is already spending to buy securities and keep long-term rates low, this will cause cash reserves that banks hold at the Fed to soar -- likely topping $5 trillion this summer, up from about $3.4 trillion now.

 

Dudley goes on to talk about the potential crack-up this may cause at the banks due to regulatory ratios (which will be much worse at the asset-capped WFC, by the way).  But he doesn't talk at all about the implications for Treasury bonds and the long end of the yield curve. 

 

Why is this also important?

 

These moves to get the TGA balance down to $120b also have ramifications for Treasury debt availability.  What's the fastest way for the US Treasury to draw down its balance?  That would be to not roll-over its Treasury debt over the next few months as it redeems those securities that come due.  This will shrink US Treasury debt outstanding by $1.5t. But the Fed will continue to buy US Treasuries at ~$100b per month. So that's a further removal of ~$500b of US Treasury debt.  Combined, the Fed and the US Treasury will shrink Treasury debt o/s by ~$2t over the next five months.

 

Current US Treasury debt held by the public is $21.76t.  From that one must also subtract the portion held by the Federal Reserve which stands at $4.82t - making the amount held by the private sector $16.94t currently.  So what will happen to rates (even at the long-end) if the supply of Treasuries held by the private sector shrinks by 12% ($2t/$16.94t) over a five month period?  Do we think rates will continue to go up?

 

Now as I look at the US Treasury Daily Statements, I don't see any sudden changes happening.  The Treasury appears to be largely rolling over its debt. 

 

But some people may say - well there's a $1.9t stimulus program about to be approved - that could be another way the US Treasury could shrink its balance without shrinking the supply of US Treasuries.  But that's a lot of cash that will hit the US private sector that will be hunting for yield.  If the supply of US Treasuries stays the same (ie the US Treasury doesn't issue more debt due to its go-to TGA target), I think rates should also fall as almost $2t of cash sloshes around the system unabsorbed by US Treasury issuance.

 

Something to keep an eye on.  Of course, Congress could come in and revise all the goals (including the date of putting the debt limit back on).

 

wabuffo

[Cigarbutt]

...But he doesn't talk at all about the implications for Treasury bonds and the long end of the yield curve. 

Why is this also important?

...

Do we think rates will continue to go up?

...

But that's a lot of cash that will hit the US private sector that will be hunting for yield. 

...

Something to keep an eye on.  Of course, Congress could...

wabuffo

Reading your post helps to underline the following question: Are interest rates still market rates?

The Fed and Treasury have to deal with this technically or fundamentally. Which way will they go?

i think the easy way is to accept that excess reserves are a permanent fixture and allow banks to permanently exclude U.S. Treasury securities and deposits at Fed banks from the calculation of their supplementary leverage ratios.

This is what happens to people having diabetes, type 2. Excess reserves is the cause and not the symptom of the disease, which is preventable. Once pills or insulin are given, people get used to excess reserves and tend to make technical adjustments (not fundamental ones).

So will long term rates rise? Unlikely.

So can long term rates rise? Not at this point.

...

In fiscal year 2020, the government’s net outlays for interest totaled $345 billion, equal to 1.6 percent of gross domestic product (GDP) and accounting for 5.3 percent of total spending.

...

The average interest rate on total marketable interest-bearing US public debt is now at 1.54%. Simply going back to rates in 2007 or 2008 would double and more the % of GDP spending and total outlays.

-----

Of course, this remains quite unpredictable and the perceived outlook is related to one's perspective about low interest rates and the following result:

Some suggest the evolution is positive. From a technical standpoint, i agree. From a fundamental point of view...

[Guest]

I'm a simple man so keep that in mind but I see all sorts of inflation. We're looking for a home and the prices are crazy (as seems to be the case across the country). I spoke with someone about building a house and they implied that lumber prices were going up pretty dramatically too. In another conversation, I was talking to a buddy this week and he was very surprised at how much new truck prices have risen as well.

 

So it seems that the risk of outsized inflation may happen especially when the economy opens up. With that being said, gold isn't really doing much so I certainly could be wrong.

[tede02]

This is a fascinating subject that I think about all the time. What will the Fed do? They've kind of put themselves in a corner.

 

They surely know if rates jump 100-200 bps, that is going to have some real impact on assets prices across the board which could leak into the real economy. But they've explicitly said they want to keep rates low because the economy isn't where they want it to be. Therefore, it seems they plan to keep the fire hose on (to keep rates down) with indefinite asset purchases until something breaks.

 

One of my worries is that few individual investors recognize how much stock market returns have been driven by low rates and QE. The sentiment is "investing is easy" without appreciating this HUGE tailwind. I worry we could experience a multi-year period of negative returns due to problems with inflation, rising rates and the money-out-flow negative feed-back loop that would probably be created.

[maplevalue]

One of my worries is that few individual investors recognize how much stock market returns have been driven by low rates and QE. The sentiment is "investing is easy" without appreciating this HUGE tailwind. I worry we could experience a multi-year period of negative returns due to problems with inflation, rising rates and the money-out-flow negative feed-back loop that would probably be created.

 

This is the million dollar question for asset markets. Current prices for stocks/bonds/housing are all dramatically 'wrong' in a higher rate world, particularly one where higher rates are driven not by productive economic activity but by high government spending.

[Spekulatius]

Just because the interest rates "can't go up" doesn't mean they wont go up. 8)

[fareastwarriors]

...

 

I worry we could experience a multi-year period of negative returns due to problems with inflation, rising rates and the money-out-flow negative feed-back loop that would probably be created.

 

What would be so bad about that? I rather Central Bank's focus on the real economy and less on boosting financial assets. If main street is doing well with higher wages, better quality of life, and less inequity while stock markets are going down, I'm perfectly okay with that.  But we don't really see that anymore. We can't withstand prolonged pain in the financial markets anymore. After some signs of distress, CB's come in with their massive rate cuts and QE infinity. 

 

 

[maplevalue]

...

 

I worry we could experience a multi-year period of negative returns due to problems with inflation, rising rates and the money-out-flow negative feed-back loop that would probably be created.

 

What would be so bad about that? I rather Central Bank's focus on the real economy and less on boosting financial assets. If main street is doing well with higher wages, better quality of life, and less inequity while stock markets are going down, I'm perfectly okay with that.  But we don't really see that anymore. We can't withstand prolonged pain in the financial markets anymore. After some signs of distress, CB's come in with their massive rate cuts and QE infinity.

 

I overall agree with you, one of the reasons the CBs/governments would not agree with you is because the 'common man'/'average voter' has become levered up ever since QE got going (see Canadian debt levels and real estate). Governments/central banks will do whatever it takes to try and keep these people out of a negative equity position, and will likely tolerate higher inflation.

[LearningMachine]

Just because the interest rates "can't go up" doesn't mean they wont go up. 8)

 

Well said :-).  Just look at what happened in 1970s despite the Fed obviously not desiring it.  History repeats.

[wabuffo]

Well said :-).  Just look at what happened in 1970s despite the Fed obviously not desiring it.  History repeats.

 

Nope - not the same at all.  Why is gold falling if the currency is being debased?

 

wabuffo

 

[Guest]

Just because the interest rates "can't go up" doesn't mean they wont go up. 8)

 

Well said :-).  Just look at what happened in 1970s despite the Fed obviously not desiring it.  History repeats.

 

Isn't that partially (mostly?) explained by completely removing the gold standard?

[wabuffo]

Isn't that partially (mostly?) explained by completely removing the gold standard?

 

It's entirely explained by Nixon severing the USD peg to gold in 1971.  That also severed the pegging of world currencies to the USD (and gold).  Stuff went sideways after that.  For example, Middle East wanted to continue to be paid in real terms for their oil at old gold price - so OPEC started raising oil prices.  Price controls were instituted in the US - which always lead to shortages (since market isn't allowed to clear) which led to the famous gas lines at the service stations which had any gasoline to sell, etc...  It was a fun decade where no govt knew what to do.

 

The 1970s were a very messy transition from one monetary regime to another (which took until Reagan/Greenspan to figure out).  1970s are nothing like today.

 

wabuffo

[maplevalue]

Well said :-).  Just look at what happened in 1970s despite the Fed obviously not desiring it.  History repeats.

 

Nope - not the same at all.  Why is gold falling if the currency is being debased?

 

wabuffo

 

I think when looking at a broader range of stores of value it is easier to see the currency debasement. Stocks/real estate being prime examples, trading cards (https://www.pwccmarketplace.com/market-indices) and fine wine (https://www.liv-ex.com/news-insights/indices/) being more esoteric examples.

 

On a much more speculative note I increasingly am of the mind that gold is becoming a relatively poor store of value. It is not too big of a stretch of the imagination to think asteroid mining, while somewhat fanciful at this very moment, has the potential to impact precious metals' values in a big way over the next 50 years.

[wabuffo]

It is not too big of a stretch of the imagination to think asteroid mining, while somewhat fanciful at this very moment, has the potential to impact precious metals' values in a big way over the next 50 years.

 

 

wabuffo

[maplevalue]

It is not too big of a stretch of the imagination to think asteroid mining, while somewhat fanciful at this very moment, has the potential to impact precious metals' values in a big way over the next 50 years.

 

 

Hence why I prefaced it by "on a much more speculative note"  :D

[Cigarbutt]

Just because the interest rates "can't go up" doesn't mean they wont go up. 8)

Yes, that's a real risk but manageable, at this point, IMO, for the reasons below.

You may like the book that wabuffo referred to: When Money Dies (if you haven't already). Even if the macro stuff is felt to be irrelevant, the book describes several interesting social phenomena that occurred then, for example when people started to look for an alternative (any) for the fiat currency (stocks for a while, cigars, apples and even rutabagas?). The author also describes well the non-linear changes that can occur when trust is lost (ties in well with the velocity concept if you believe in this) with people buying their food in the morning before the food gets more expensive during the day.

 

Something that the book helps with is to differentiate from the 70s or today and the essential ingredients necessary for runaway inflation. There has to be an alternative. The Weimar hyperinflation story is a currency exchange story. For the USD, what is the alternative: the euro, the yen, the renminbi, bitcoin?, asteroid mining? In the 70s, when the tie to gold was definitely severed, there was a time-limited crisis of confidence until it was realized that the USD had become the indispensable global reserve currency.

 

Money just got flooded in the US (and global; some it went to China and overseas, see the direction of the trade balance with people using some of the free money to buy imports) plumbing monetary system.

https://finance.yahoo.com/news/online-banks-lower-their-savings-rate-212426441.html

My bet, at this point, is that this is more like a flash flood than a secular undercurrent.

It could get slippery when wet but i remember the best time to go up a mountain in Hawaï was right after a flash flood.

[tede02]

...

 

I worry we could experience a multi-year period of negative returns due to problems with inflation, rising rates and the money-out-flow negative feed-back loop that would probably be created.

 

What would be so bad about that? I rather Central Bank's focus on the real economy and less on boosting financial assets. If main street is doing well with higher wages, better quality of life, and less inequity while stock markets are going down, I'm perfectly okay with that.  But we don't really see that anymore. We can't withstand prolonged pain in the financial markets anymore. After some signs of distress, CB's come in with their massive rate cuts and QE infinity.

 

I don't really disagree. My worries are mostly for my clients, many of whom are just regular retirees living off of a retirement portfolio. If we went through a 10-year period of no returns, that could create some major financial stress for a lot of people. The Fed surely knows this too which puts further pressure on policy makers. They also have to wonder (like me) if they are setting the stage for some major blow-up or extended period of stagflation.

[randomep]

I'm a simple man so keep that in mind but I see all sorts of inflation. We're looking for a home and the prices are crazy (as seems to be the case across the country). I spoke with someone about building a house and they implied that lumber prices were going up pretty dramatically too. In another conversation, I was talking to a buddy this week and he was very surprised at how much new truck prices have risen as well.

 

So it seems that the risk of outsized inflation may happen especially when the economy opens up. With that being said, gold isn't really doing much so I certainly could be wrong.

 

Sir I beg to differ. I bought a very average honda suv for $26k, including added after market self driving.  If we go back in time to 1990, how much would such a car be worth? I mean it can almost drive itself on hwy.  Based on the inflation calculator prices have doubled from 1990 to now. So can I buy a smiilar car for $13k then?  I wouldn't think so, so there..... in terms of suvs the price real costs have gone down.

 

In terms of computers, I can buy a minimalist non-laptop computer with a basic monitor for about $200. In 1990, that computer would cost 2-3k?

 

Cell-phones? they didn't exist.

 

Jeans, I remember I had to work hard to save $50 to pay a decent pair of jeans, now? $20!

 

I was a kid and we weren't wealthy and I wanted a chess clock  (the type you see on the Queen's Gambit on neflix), those cost $50-80, I had to deliver papers to save up to pay for it.  Now? we got the digital chess clocks that are much better, and they are $35, so now I can get a better quality product for less than 1/2 price.

 

Travelling by airlines was a luxury, now it is so common it is like taking a bus.

 

I feel we all just too easily fall into groupthink and don't challenge the complaints and negativity in the media.

 

Inflation index calculates the average living expenses and for the most part I feel it is an accurate reflection but the cost of really long term assets like land and money generating assets, have gone to absurd levels..... cough cough hmmmm tesla cough hmmmmm.

 

 

[Guest]

I'm a simple man so keep that in mind but I see all sorts of inflation. We're looking for a home and the prices are crazy (as seems to be the case across the country). I spoke with someone about building a house and they implied that lumber prices were going up pretty dramatically too. In another conversation, I was talking to a buddy this week and he was very surprised at how much new truck prices have risen as well.

 

So it seems that the risk of outsized inflation may happen especially when the economy opens up. With that being said, gold isn't really doing much so I certainly could be wrong.

 

Sir I beg to differ. I bought a very average honda suv for $26k, including added after market self driving.  If we go back in time to 1990, how much would such a car be worth? I mean it can almost drive itself on hwy.  Based on the inflation calculator prices have doubled from 1990 to now. So can I buy a smiilar car for $13k then?  I wouldn't think so, so there..... in terms of suvs the price real costs have gone down.

 

In terms of computers, I can buy a minimalist non-laptop computer with a basic monitor for about $200. In 1990, that computer would cost 2-3k?

 

Cell-phones? they didn't exist.

 

Jeans, I remember I had to work hard to save $50 to pay a decent pair of jeans, now? $20!

 

I was a kid and we weren't wealthy and I wanted a chess clock  (the type you see on the Queen's Gambit on neflix), those cost $50-80, I had to deliver papers to save up to pay for it.  Now? we got the digital chess clocks that are much better, and they are $35, so now I can get a better quality product for less than 1/2 price.

 

Travelling by airlines was a luxury, now it is so common it is like taking a bus.

 

I feel we all just too easily fall into groupthink and don't challenge the complaints and negativity in the media.

 

Inflation index calculates the average living expenses and for the most part I feel it is an accurate reflection but the cost of really long term assets like land and money generating assets, have gone to absurd levels..... cough cough hmmmm tesla cough hmmmmm.

 

haha yeah man, but I'm talking about over the past year or so. ;)

 

 

[Lollapalooza]

Appreciate this discussion. I'm struggling to see a scenario where we wont see strong inflation picking up soon...

 

It's obvious that we have seen strong deflationary forces pushing prices down - e.g. tech and ecommerce driving prices down vs. physical retail, outsourcing supply chains to low cost countries, weak commodities cycle, oil excess capacity, etc.

 

Now lets list 'what's possibly coming':

- desire to bring back previously outsourced supply chains even by sacrificing lower production input costs;

- less openness to global trade;

- ecommerce widely adopted with majority of its lower pricing already in effect;

- unprecedented money printing;

- likely commodity supercycle incoming;

- death of US shale oil, possible future under supply as economy opens up?

 

I really struggle to reconcile the above with the "inflation is dead" rhetoric.

[LearningMachine]

I'm a simple man so keep that in mind but I see all sorts of inflation. We're looking for a home and the prices are crazy (as seems to be the case across the country). I spoke with someone about building a house and they implied that lumber prices were going up pretty dramatically too. In another conversation, I was talking to a buddy this week and he was very surprised at how much new truck prices have risen as well.

 

So it seems that the risk of outsized inflation may happen especially when the economy opens up. With that being said, gold isn't really doing much so I certainly could be wrong.

 

Sir I beg to differ. I bought a very average honda suv for $26k, including added after market self driving.  If we go back in time to 1990, how much would such a car be worth? I mean it can almost drive itself on hwy.  Based on the inflation calculator prices have doubled from 1990 to now. So can I buy a smiilar car for $13k then?  I wouldn't think so, so there..... in terms of suvs the price real costs have gone down.

 

In terms of computers, I can buy a minimalist non-laptop computer with a basic monitor for about $200. In 1990, that computer would cost 2-3k?

 

Cell-phones? they didn't exist.

 

Jeans, I remember I had to work hard to save $50 to pay a decent pair of jeans, now? $20!

 

I was a kid and we weren't wealthy and I wanted a chess clock  (the type you see on the Queen's Gambit on neflix), those cost $50-80, I had to deliver papers to save up to pay for it.  Now? we got the digital chess clocks that are much better, and they are $35, so now I can get a better quality product for less than 1/2 price.

 

Travelling by airlines was a luxury, now it is so common it is like taking a bus.

 

I feel we all just too easily fall into groupthink and don't challenge the complaints and negativity in the media.

 

Inflation index calculates the average living expenses and for the most part I feel it is an accurate reflection but the cost of really long term assets like land and money generating assets, have gone to absurd levels..... cough cough hmmmm tesla cough hmmmmm.

 

 

How much money did you spend in 1990 on Apple iPhone, Mobile cellphone plan, Pharma medications (through insurance), college education, etc.?

 

CPI is still measuring the things people used to consume decades ago, and is not measuring what is soaking up the money supply today.

 

Inflation comes from people competing with each other to spend the extra money supply on the same limited items that have pricing power, and that is happening.  Those who have pricing power are soaking up the extra money supply.  It is just that CPI is not measuring some of those things people are competing with each other to spend the extra printed dollars on.  In 1970s, it happened to be oil that was soaking up the extra money supply. Today, some companies have pricing power and soaking it up because they can.

[LearningMachine]

I feel we all just too easily fall into groupthink.

 

Groupthinking has been thinking that the current inflation and interest rates at around the lowest level in decades will stay this low forever.  That is still the real risk.

 

It is amazing that folks will sometimes worry about events that have less than 5% probability, but they will ignore the possibility of something having much higher probability, i.e. higher inflation/rates because they feel so convicted that inflation/interest rates will stay this low.

 

They will invent all kinds of complex arguments around money being locked up in the Federal Reserve, even though all Federal Reserve is doing is recording the transactions.  This is similar to saying all real estate is locked up inside the County Recorder's office and no real estate can leave the county recorder's office.  All you can do is move real estate around within the County Recorder's office, but that doesn't prevent it from being recorded at higher and higher valuations.

 

[tede02]

I'm a simple man so keep that in mind but I see all sorts of inflation. We're looking for a home and the prices are crazy (as seems to be the case across the country). I spoke with someone about building a house and they implied that lumber prices were going up pretty dramatically too. In another conversation, I was talking to a buddy this week and he was very surprised at how much new truck prices have risen as well.

 

So it seems that the risk of outsized inflation may happen especially when the economy opens up. With that being said, gold isn't really doing much so I certainly could be wrong.

 

Sir I beg to differ. I bought a very average honda suv for $26k, including added after market self driving.  If we go back in time to 1990, how much would such a car be worth? I mean it can almost drive itself on hwy.  Based on the inflation calculator prices have doubled from 1990 to now. So can I buy a smiilar car for $13k then?  I wouldn't think so, so there..... in terms of suvs the price real costs have gone down.

 

In terms of computers, I can buy a minimalist non-laptop computer with a basic monitor for about $200. In 1990, that computer would cost 2-3k?

 

Cell-phones? they didn't exist.

 

Jeans, I remember I had to work hard to save $50 to pay a decent pair of jeans, now? $20!

 

I was a kid and we weren't wealthy and I wanted a chess clock  (the type you see on the Queen's Gambit on neflix), those cost $50-80, I had to deliver papers to save up to pay for it.  Now? we got the digital chess clocks that are much better, and they are $35, so now I can get a better quality product for less than 1/2 price.

 

Travelling by airlines was a luxury, now it is so common it is like taking a bus.

 

I feel we all just too easily fall into groupthink and don't challenge the complaints and negativity in the media.

 

Inflation index calculates the average living expenses and for the most part I feel it is an accurate reflection but the cost of really long term assets like land and money generating assets, have gone to absurd levels..... cough cough hmmmm tesla cough hmmmmm.

 

All very good points. I was trying to think of where we have experienced inflation. The ones that come to mind are:

 

1. healthcare

2. childcare

3. education

4. housing

 

The whole debate about inflation vs. deflation is interesting. I heard about a study that valued Google's "free" services (search, email, storage, etc.) at over $20k per year per person. I have no idea of the methodology used. But the greater point is all these things that the internet provides for no-out-of-pocket to consumers definitely does appear deflationary. I heard someone say just this morning that the "inflation animal" that economists are trying to measure today is one that no one has ever seen in the wild. The point this person was making is there are all these online services that are virtually impossible to measure so no one really knows where the hell things are at. That resonated with me.

[TwoCitiesCapital]

I feel we all just too easily fall into groupthink.

 

Groupthinking has been thinking that the current inflation and interest rates at around the lowest level in decades will stay this low forever.  That is still the real risk.

 

It is amazing that folks will sometimes worry about events that have less than 5% probability, but they will ignore the possibility of something having much higher probability, i.e. higher inflation/rates because they feel so convicted that inflation/interest rates will stay this low.

 

They will invent all kinds of complex arguments around money being locked up in the Federal Reserve, even though all Federal Reserve is doing is recording the transactions.  This is similar to saying all real estate is locked up inside the County Recorder's office and no real estate can leave the county recorder's office.  All you can do is move real estate around within the County Recorder's office, but that doesn't prevent it from being recorded at higher and higher valuations.

 

It seems bifurcated to me. Every year since 2010, I've been told rates can't go any lower and the only rate is up and that Fed printing leads to inflation. None of that happens, but suggests the predominant bias is to rates being higher.

 

But I've also been told 20-25x P/Es on indices is ok because rates are low and will remain so, thus elevated multiples make sense. Which seems to suggest the predominant narrative is that rates are low and will remain so.

 

I imagine you could find many people who would agree with both concepts in separate conversations where it isn't immediately clear they're contradicting themselves.

 

For me? Low rates =\= high multiples, but I do think low rates are here for a little while longer. I deserve the right to change my mind if the Treasury keeps at it though, because then that's a whole new ballgame.