How is the Fed going to cut rates with inflation over 3%?

[changegonnacome]

1 hour ago, gfp said:

It sounds like that but in reality it is a swap of some type of Bond for Bank Reserves.  Bank reserves are not useful or important and they can't be used to buy stocks or really make their way into the real economy.  Lending by large Fed member banks is not constrained by bank reserves in the system.  Lending is restrained by capital ratios, demand for loans, appetite to take risk, regulatory changes on what counts for what, etc...  

 

New money ("inflation") makes it into the real economy in two primary ways.  1.) The government deficit spends it into the economy.  and 2.) Banks make new loans.

 

yep exactly right - the Fed never bought a car/home in the real economy in its life....its why the QE games of the early 2010's were so disappointing in terms of their ability to kick start economic growth post-GFC........and why the helicopter money of 2020 lit the economy literally on fire in a matter of weeks....one (QE) is an accounting game that can through financial conditions (interest rates) have an effect on the economy.....fiscal hits the economy right in the guts.

 

Put another way QE is like thinking about doing heroin.......fiscal spending is mainlining heroin......I couldn't care less what JPow does with the balance sheet.....but if you tell me that the budget deficit is getting cut next year from 7% to 3% I'm all ears.

[ArminvanBuyout]

It seems like the largest increase in fiscal spending recently is interest expense, which then flows back into the economy. So in a way, isn't this a bit circular, where keeping rates high continues to drive fiscal spending, which continues to prop up economy (i.e. stimulative to the point of the comment a page or two ago).

 

Would there be a scenario where the geniuses at the Fed see that, and will cut to "reduce" the fiscal impact?

[Eldad]

28 minutes ago, ArminvanBuyout said:

It seems like the largest increase in fiscal spending recently is interest expense, which then flows back into the economy. So in a way, isn't this a bit circular, where keeping rates high continues to drive fiscal spending, which continues to prop up economy (i.e. stimulative to the point of the comment a page or two ago).

 

Would there be a scenario where the geniuses at the Fed see that, and will cut to "reduce" the fiscal impact?

Like 10% of it is owned by the Social security trust fund, so higher rates keep that funded slightly longer. 
 

Unfortunately like 30%+ goes overseas. 

[gfp]

5 minutes ago, Eldad said:

Like 10% of it is owned by the Social security trust fund, so higher rates keep that funded slightly longer. 
 

Unfortunately like 30%+ goes overseas. 

 

Please don't lose any sleep over the social security trust fund.  

[RichardGibbons]

9 hours ago, blakehampton said:

GDP growth has averaged around 2% over the last 10-20 years and 3% preceding that. I think 2% is a good average for growth going forward.

 

Not disagreeing strenuously with your argument, but is there a reason to believe that the companies in the stock market ought to grow at roughly the same rate as GDP?

Like, I imagine a tiny percentage of failing businesses are publicly-traded. And I imagine that higher-growth businesses are more likely to be public (because they can get better valuations), and that businesses that have better competitive advantages are more likely to be public (because they will likely leverage those advantages to grow bigger, and most big companies are public.)

 

I just wonder if you're effectively saying that the average high school student's mark is 70%, so we should expect people who have incomes over $300K/year to have averaged 70% in high school.

[Jaygo]

17 hours ago, changegonnacome said:

Put another way QE is like thinking about doing heroin.......fiscal spending is mainlining heroin......I couldn't care less what JPow does with the balance sheet.....but if you tell me that the budget deficit is getting cut next year from 7% to 3% I'm all ears.

 

Yeah this is pretty bang on. I would say that fiscal spending like roads and infrastructure, student loan forgiveness and plain old cheques in the mail affects asset prices less than QE so may be the better way to go if you wan to goose the economy. The trouble is if they continue to do it for too long the government ends up being the economy.

[DooDiligence]

18 hours ago, changegonnacome said:

Put another way QE is like thinking about doing heroin.......fiscal spending is mainlining heroin......I couldn't care less what JPow does with the balance sheet.....but if you tell me that the budget deficit is getting cut next year from 7% to 3% I'm all ears.

 

“I could end the deficit in five minutes,” Buffett said. “You just pass a law that says that any time there’s a deficit of more than three percent of GDP, all sitting members of Congress are ineligible for re-election.” His proposal, though delivered with a chuckle, carried an undeniable logic – by directly tying lawmakers’ political futures to the nation’s fiscal health, they would have a powerful incentive to rein in spending and balance the budget.

[Blake Hampton]

13 hours ago, RichardGibbons said:

 

Not disagreeing strenuously with your argument, but is there a reason to believe that the companies in the stock market ought to grow at roughly the same rate as GDP?

Like, I imagine a tiny percentage of failing businesses are publicly-traded. And I imagine that higher-growth businesses are more likely to be public (because they can get better valuations), and that businesses that have better competitive advantages are more likely to be public (because they will likely leverage those advantages to grow bigger, and most big companies are public.)

 

I just wonder if you're effectively saying that the average high school student's mark is 70%, so we should expect people who have incomes over $300K/year to have averaged 70% in high school.

I want to quickly mention that @Dinar corrected me by saying that using the growth rate in nominal GDP is more accurate than real. I'm glad he did because it cleared a lot of things up for me.

 

In the past, Buffett mentioned that corporate profits should average out at about 6% of GDP over time. We've seen them increase up to around 10% of GDP starting from right before the financial crisis all the way up until now. I don't have any great insight on what is happening there but I do know that it has caused earnings growth to outpace GDP growth. Essentially money has flowed from other parts of our economy into company earnings. I still think though that using that long-term average for nominal GDP growth is the right way to go. Of course I could always be wrong.

Edited April 4 by blakehampton

[ValueArb]

15 hours ago, ArminvanBuyout said:

It seems like the largest increase in fiscal spending recently is interest expense, which then flows back into the economy. So in a way, isn't this a bit circular, where keeping rates high continues to drive fiscal spending, which continues to prop up economy (i.e. stimulative to the point of the comment a page or two ago).

 

Would there be a scenario where the geniuses at the Fed see that, and will cut to "reduce" the fiscal impact?

 

The US should voluntarily raise the interest rates on all federal debt to 20% annualized, not only would it make the owners of the debt really happy (including China) but it wouldn't cost anything because it would just flow back into the economy.

[gfp]

5 minutes ago, ValueArb said:

 

The US should voluntarily raise the interest rates on all federal debt to 20% annualized, not only would it make the owners of the debt really happy (including China) but it wouldn't cost anything because it would just flow back into the economy.

 

As far as T-bills go, which is where most of the government is funded, the Federal Reserve could do this almost immediately.  And it would be incredibly inflationary.  Not cost-less.  Which kind of highlights the backwards nature of conventional thinking on Fed moves.

[changegonnacome]

4 hours ago, Jaygo said:

Yeah this is pretty bang on. I would say that fiscal spending like roads and infrastructure, student loan forgiveness and plain old cheques in the mail affects asset prices less than QE so may be the better way to go if you wan to goose the economy. The trouble is if they continue to do it for too long the government ends up being the economy.

 

Yep its a capital allocation thing (like any corporate). Fiscal deficit spending on infrastructure which over time increases the productivity and output potential of your economy has a positive ROIC. This is good deficit spending if done correctly - interstate highways, the railroads, the internet etc. Inside Biden's giveaways to his credit there is some of this spending but it feels more like much needed maintenance capex as opposed to growth capex......

 

Fiscal deficits for transfer payments that get sent to people who then spend it on say shitcoins or crappolla made in china....well the money just basically evaporates....and what's left is only the debt.....and a trade deficit which in effect comes back as non-US entities individuals owning a piece of America.....I mean I see stories about Chinese folks owning farm land in the Midwest or CRE in Manhattan......I mean what do you expect?!?!?!....we send them dollars printed on paper......and they recycle those $$$ into owning assets in the USA......trade deficits are like taking a sliver of the American pizza pie and an annualized basis giving it to somebody so we can continue to consume more than we produce....sure its a small sliver but over a 100yrs of trade deficits one should expect to frequently find that assets all around them (farm land, CRE etc. ) is owned by non-US persons.....this isn't to say that one day the USA will be 'sold' overseas....that isnt how it works.....cause the 'book' value of the USA just keeps increasing.

[changegonnacome]

4 hours ago, DooDiligence said:

“I could end the deficit in five minutes,” Buffett said. “You just pass a law that says that any time there’s a deficit of more than three percent of GDP, all sitting members of Congress are ineligible for re-election.” His proposal, though delivered with a chuckle, carried an undeniable logic – by directly tying lawmakers’ political futures to the nation’s fiscal health, they would have a powerful incentive to rein in spending and balance the budget.

 

He's right - but the exception that would break the rule....is that sometimes and very rarely in an emergency you really want them to blow out the deficit....wars, pandemics, natural disasters, financial catastrophes.....forgetting all the Monday morning quarterbacking on COVID and its severity.....and assuming a pandemic with a confirmed fatality rate of 30% & aerial transmission........you want the folks in D.C. to print 15% budget deficits to bridge the society from potential mad max chaos to a vaccine....so no perfect solution.

 

The hard money folks - gold, BTC - forget the secret sauce of FIAT, for all its failings and there are many, it acts like a shock absorber in times of crisis and allows the fiscal/monetary authorities to flood the system with liquidity....fiat money becomes an almost instantaneous redistribution mechanism. The hard money Satoshi Nakamoto folks would choose to literally watch Rome burn instead.

[thepupil]

15 hours ago, RichardGibbons said:

 

Not disagreeing strenuously with your argument, but is there a reason to believe that the companies in the stock market ought to grow at roughly the same rate as GDP?

Like, I imagine a tiny percentage of failing businesses are publicly-traded. And I imagine that higher-growth businesses are more likely to be public (because they can get better valuations), and that businesses that have better competitive advantages are more likely to be public (because they will likely leverage those advantages to grow bigger, and most big companies are public.)

 

I just wonder if you're effectively saying that the average high school student's mark is 70%, so we should expect people who have incomes over $300K/year to have averaged 70% in high school.

SPX sales/share for last 20 years is in high 3's-4's, EPS / share high 6's (average of 10 yr CAGR's). So I'd say the history/empirical observation is the reason. If you don't put stock in margin expansion continuing then sales/share which seems roughly in line w/ nominal GDP seems fairly predictive over long term (with lots of noise of course). 

 

there's been absolutely zero mean reversion in margins over the course of my (going on 15) year career despite people calling for it and in fact market has been more weighted to higher margin businesses, so I'm not entirely dismissing your point, but for S&P 500 at least (profitable large caps) long term per share sales growth has empirically not been to high. 

 

the Nasdaq 100 index does have higher sales growth. last 10 years for example  (2023/2013), = 11% per year per share sales growth and 12% per share operating earnings growth.  it trades for 35x 2023 29x 2024E and 25x 2025E 

[RichardGibbons]

That makes sense.  Thx, thepupil.

[ArminvanBuyout]

I saw recently that US firms have been increasing market share internationally - one reason for why earnings growth has outpaced GDP growth.

 

The other reason is that if you believe technology drives winner takes most/all dynamics, then the larger companies (who are generally winners) should disproportionate amount of market share from private companies, resulting in public companies representing larger % of the GDP pie 

[james22]

The first ~8min are on-topic:

 

We're on the confluence of two huge forces that are butting up against each other. The free market which is increasingly deflationary opposing another one that is a controlled market that is increasingly inflationary to protect the existing system from failing.

 

 

[james22]

 

[Cigarbutt]

16 hours ago, ArminvanBuyout said:

I saw recently that US firms have been increasing market share internationally - one reason for why earnings growth has outpaced GDP growth.

The other reason is that if you believe technology drives winner takes most/all dynamics, then the larger companies (who are generally winners) should disproportionate amount of market share from private companies, resulting in public companies representing larger % of the GDP pie 

The conclusion that market cap growth has decoupled from GDP (and may continue to do so) may be correct but the two underlying assumptions that are mentioned appear to be incorrect.

1-When using GNP instead of GDP in the ratio, the international part which is described above does not materially change the picture.

2-When using NIPA profits (which is an imperfect measure bla bla bla ok but still...) which also includes private companies, the same trend appears.

-----

Now, as to why margins have decoupled is anybody's guess but i'd bet public deficits play a role.

The following is the same corporate profit line with, superimposed, the budget deficit. Look at what happened since 1999 when Mr. Buffett assumed that margins hovering around 6% would be the norm (absent fiscal largesse? which is sustainable?).

Edited April 5 by Cigarbutt
minor spelling mistakes

[gfp]

Good post Cigarbutt.  It probably obvious but of course the corporate income tax has been materially reduced as well.

[Dinar]

1 hour ago, Cigarbutt said:

The conclusion that market cap growth has decoupled from GDP (and may continue to do so) may be correct but the two underlying assumptions that are mentioned appear to be incorrect.

1-When using GNP instead of GDP in the ratio, the international part which is described above does not materially change the picture.

2-When using NIPA profits (which is an imperfect measure bla bla bla ok but still...) which also includes private companies, the same trend appears.

-----

Now, as to why margins have decoupled is anybody's guess but i'd bet public deficits play a role.

The following is the same corporate profit line with, superimposed, the budget deficit. Look at what happened since 1999 when Mr. Buffett assumed that margins hovering around 6% would be the norm (absent fiscal largesse? which is sustainable?).

Margins may have permanently increased because the composition of the market has changed.  Software companies such as MSFT & monopolies/oligopolies such as Meta, Google, and V/MA are a very % of market, and they have very fat margins.

[ValueArb]

22 hours ago, changegonnacome said:

 

He's right - but the exception that would break the rule....is that sometimes and very rarely in an emergency you really want them to blow out the deficit....wars, pandemics, natural disasters, financial catastrophes.....forgetting all the Monday morning quarterbacking on COVID and its severity.....and assuming a pandemic with a confirmed fatality rate of 30% & aerial transmission........you want the folks in D.C. to print 15% budget deficits to bridge the society from potential mad max chaos to a vaccine....so no perfect solution.

 

The hard money folks - gold, BTC - forget the secret sauce of FIAT, for all its failings and there are many, it acts like a shock absorber in times of crisis and allows the fiscal/monetary authorities to flood the system with liquidity....fiat money becomes an almost instantaneous redistribution mechanism. The hard money Satoshi Nakamoto folks would choose to literally watch Rome burn instead.

 

You're telling me that politicians wouldn't do the right thing for the country in an emergency even if it cost their jobs?

 

Just one more reason for a permanent two term limit for every elected official.

[TwoCitiesCapital]

On 4/4/2024 at 1:22 PM, changegonnacome said:

The hard money folks - gold, BTC - forget the secret sauce of FIAT, for all its failings and there are many, it acts like a shock absorber in times of crisis and allows the fiscal/monetary authorities to flood the system with liquidity....fiat money becomes an almost instantaneous redistribution mechanism. The hard money Satoshi Nakamoto folks would choose to literally watch Rome burn instead.

 

Didn't Rome still burn, and later fall, despite devaluing their currency multiple times?

 

 

[ValueArb]

39 minutes ago, TwoCitiesCapital said:

 

Didn't Rome still burn, and later fall, despite devaluing their currency multiple times?

 

 

 

It devalued their currency many times over hundreds of years before the Western Roman empire finally fell for good. One could argue that it fell in a large part because of debasing of the currency. It was done to avoid dealing with fiscal consequences of unsustainable spending and ended up making the currency less trustworthy and it harder to maintain the domestic troop levels it needed, so over time its legions filled with more and more cheaper barbarians.

 

One benefit was the influx of some very talented and ambitious foreigners who improved the Roman army, a few who ended up rising to generals and even emperor. The negative was the influx of many more mercenary recruits who used it as a path to personal power and even foment rebellions to free their own peoples. 

 

It would be as if we started recruiting in Mexico, Iraq, China and Central America to fill out our military more cheaply. Then when we are fighting a low level conflict with Iran, a US division heavily made up of middle eastern recruits and led by an Iraqi-American general revolts to conquer Saudi Arabia and put the Persian gulf under their control and naming him the new Shah of Arabia. 

 

Its not a perfect analogy because Romans conquered for loot to make themselves far wealthier, and only grudgingly gave conquered Roman rights in order to keep them relatively subservient. The US has hundreds of foreign bases across the world that are all massive cost centers that cost us immense wealth, all in either the idea that we are either making a better world by keeping more of it free or protecting world commerce so that a small percentage of the spending returns to us in trade. So hopefully once we come to the realization that our fiscal spending is unsupportable the answer will be to close most of those bases or require our allies to start contributing more equitably to the costs of keeping the world somewhat freer.

Edited April 6 by ValueArb

[james22]

10 minutes ago, ValueArb said:

It would be as if we started recruiting in Mexico, Iraq, China and Central America to fill out our military more cheaply.

 

https://apnews.com/article/army-air-force-recruiting-shortfall-immigrants-citizenship-2cd690352210606945010d1800c5bdbe

 

 

[Jaygo]

2 hours ago, ValueArb said:

 

It devalued their currency many times over hundreds of years before the Western Roman empire finally fell for good. One could argue that it fell in a large part because of debasing of the currency. It was done to avoid dealing with fiscal consequences of unsustainable spending and ended up making the currency less trustworthy and it harder to maintain the domestic troop levels it needed, so over time its legions filled with more and more cheaper barbarians.

 

One benefit was the influx of some very talented and ambitious foreigners who improved the Roman army, a few who ended up rising to generals and even emperor. The negative was the influx of many more mercenary recruits who used it as a path to personal power and even foment rebellions to free their own peoples. 

 

It would be as if we started recruiting in Mexico, Iraq, China and Central America to fill out our military more cheaply. Then when we are fighting a low level conflict with Iran, a US division heavily made up of middle eastern recruits and led by an Iraqi-American general revolts to conquer Saudi Arabia and put the Persian gulf under their control and naming him the new Shah of Arabia. 

 

Its not a perfect analogy because Romans conquered for loot to make themselves far wealthier, and only grudgingly gave conquered Roman rights in order to keep them relatively subservient. The US has hundreds of foreign bases across the world that are all massive cost centers that cost us immense wealth, all in either the idea that we are either making a better world by keeping more of it free or protecting world commerce so that a small percentage of the spending returns to us in trade. So hopefully once we come to the realization that our fiscal spending is unsupportable the answer will be to close most of those bases or require our allies to start contributing more equitably to the costs of keeping the world somewhat freer.

An empire cannot really fall unless there is a suitable replacement. The UK gave way to a far stronger but allied USA, it was a smooth transition with somewhat similar beliefs. The USSR in Gorbachev had a really great opportunity as well all things considered. Their ego may have been bruised but their villages were not pillaged.

 

There is currently no viable replacement to the US so the US cannot move out of the way and fade gracefully like the UK with their pomp and dignity intact. 

 

That makes it more likely that the Empire remains in power longer and more likely that it becomes a bit ugly towards the end, whenever that may be. As far as I understand the roman empire went out like a blind sick dog. The people lost faith, the empire became scared and forceful against its own and that caused the people to revolt leading to centre of power shifting to the Byzantines.