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

[scorpioncapital]

humans love their big brother protective cocoon? Without fail, they will deliver?

[thepupil]

10 hours ago, Gregmal said:

I actually think, although haven’t thought too heavily, about how decent a hedge trade it would be to go long an obnoxious amount of like 20 year treasuries on margin. 
 

Right so buying puts is generally a sophisticated white collar guys way of throwing money in the garbage. Shorting as well is largely a fools game. But if I can borrow/margin at 6-7%, while getting paid 4.5%, what’s my upside and what’s my downside? 
 

The never relenting “inflation fanatics” who have seen inflation everywhere for much of the last decade or so still see it, and after nearly two years of monthly declines in the data we get an expected hiccup or two…no it doesn’t mean we re heading back to 5-10%…but it’s given us a neat setup as a few of the fringe participants start leaning on the very short term data because gee, if we can’t trade or gamble on every daily or weekly theme…whats the point? 
 

So really, if I go long a monstrous amount of the 20 year treasury, maybe I assume 10-15% upside risk if we run back to last years highs which were basically just a well timed Ackman pump? Plus the margin rate minus the interest so call it another 3? But if shit hits the skids….Fed drooling to cut. Could we hit 30-50% upside? Definitely think so. 
 

So a heads I’m hedging and not losing much and my longs soar on more good data, tails I have a hero trade on my hands at de minimus cost….

 

@Gregmalbecoming a long duration buyoooooor.

 

if you really want to do this, just buy 30yr futures options....you'll get section 1256 tax treatment on the losses/gains 

 

[Gregmal]

LOL it just seems simple from a risk reward although Im not sure I am enticed enough to put it on because I dont really see a massive recession on the horizon. The futures options same deal except they kinda fall into the options category where I need to be somewhat right on the timing or the option is a zero. But generally, it just seems like a lot of the mouthy "gotcha" like talking heads are back with "there won't be...gasp....rate cuts this year"...and its like "ok, so we stay where we are, whats the problem?....to which we get some iteration of "the market is priced for perfection"...which I think to myself, "ok, but weren't you same people saying this 500/1000/1500 SPY points ago too? "...I mean even if we get another HIKE....uhhh...its not gonna be more than 25/50....and only if the economy keep raging...so who TF cares? Seems like everyone is trying to day trade their way into next week or months news...meanwhile theyre missing the old economy stocks that largely sucked the past decade...ripping. Citi is hot fire right now. GM dont look now, even that turd catching a bid. Energy is good to go. Entertainment is sound. Building stuff is blazing....but yea...it all comes down to March CPI....will they, or won't they? It all comes down to this! Some of this shit is so stupid. And oh yea, AI is a bubble! 

[Gregmal]

Even China seems to have bottomed and is undoubtedly cheap. The inflation screamers just remind me of the covid variant screamers in 2021. Like just let it go already lol. 

[Jaygo]

I'm not in the screamer camp but I certainly wouldn't say the economy is raging.  Carloads are down, hiring is down, some retail is shit, some is strong but mostly we are in a middling stage where folks dont know if they should tighten up or let loose. A small drop in rates is all it will take to nudge people to relax a little and make them feel their futures are secure.

 

So yeah if I was in charge Id drop rates and let inflation run a bit hot. 2% over trend. It gets people and money moving and makes depts easier to pay. It also allows for more production that would temper inflation!!! housing especially.

 

Supply chain inflation is a lot different than monetary supply inflation. In 2021-2022 we had both. Now if we settle into just monetary inflation everyone is going to feel a lot better.

 

 

 

 

 

 

 

 

[Gregmal]

In order for inflation to get anywhere near 5% we'd need a "raging" economy. I think 3-4% is here and fine and they'll likely cut as they said a few times but I think rates in the 3-4% camp are fine. We dont need 0%, and we dont need, but can probably live with the 4-5% we are at now although thats probably benefitting savers more than necessary. In general though its just the constant noise, from the same folks. We were lied to about the recession that was "already underway" for 3 years. Now that seems finally abandoned because the "inflation is here to stay" crowd gets a couple prints that confirm all their biases....after those same folks told us we needed more than "a couple" down prints to confirm inflation was subsiding. 

[Intelligent_Investor]

People are realizing rates and monetary policy will barely make a dent in inflation if you have a government that is gonna rain fiscal stimulus from the sky. Rate cuts generally only effect that ultra-rich and wall street, not as much main street. But fiscal stimulus and policies such as rent moratoriums, student loan forgiveness etc all puts money directly in the pockets of the average person who then goes out and spends driving up prices. Cutting rates will lead to asset price inflation, not inflation of every day items, and most assets are owned by the rich anyways who are have a lower propensity to spend vs the average middle class family.

[Viking]

On 3/31/2024 at 5:16 AM, gfp said:

The number one reason to consider cutting short term interest rates is that they didn't work as intended to slow the economy or reduce inflation.  They used to work slightly better by pulling back on the creation of new bank money creation into the economy but that indirect dynamic has been overtaken by the fiscal effect of t-bill interest increasing deficit spending stimulus.

 

The best reason to stop doing something is that you realize it isn't working.

 

If the government is really concerned about inflation it isn't all that hard to figure out how to tackle it (moderate fiscal deficit stimulus as a percentage of GDP).  But it won't involve the Federal Reserve except indirectly through their policy rate's influence on government interest expense / deficit.

 

I will add, like a broken record, also, that QE and QT are not effective tools and accomplish almost exactly nothing (and have several dynamics that are more effective in the opposite direction than the way they are used and commonly understood).  The Federal Reserve is not the agency with the toolkit for this issue. 

The problem is we have been taught to believe that it is the Fed’s job to fight inflation. If the Fed throws in the towel on fighting inflation - what happens next? Brave new world? We KNOW the politicians (of all parties) will not do anything - until catastrophe hits. It really is an interesting set up.

 

i think we are learning that fiscal policy trumps monetary policy in todays environment when it comes to inflation. And those in charge of fiscal policy are going to deny it to their dying breath. That suggests to me that inflation will probably remain elevated. Especially if central banks start to ease (that will stimulate interest rate sensitive sectors of the economy like housing). 
 

The bond market just might be the thing to watch moving forward. After all, bond investors have the most to lose if inflation gets out of control. And my assumption is they are not idiots - but i really have no idea.

Edited April 2 by Viking

[ratiman]

1 hour ago, Gregmal said:

In order for inflation to get anywhere near 5% we'd need a "raging" economy. I think 3-4% is here and fine and they'll likely cut as they said a few times but I think rates in the 3-4% camp are fine. We dont need 0%, and we dont need, but can probably live with the 4-5% we are at now although thats probably benefitting savers more than necessary. In general though its just the constant noise, from the same folks. We were lied to about the recession that was "already underway" for 3 years. Now that seems finally abandoned because the "inflation is here to stay" crowd gets a couple prints that confirm all their biases....after those same folks told us we needed more than "a couple" down prints to confirm inflation was subsiding. 

It's not the case that the recession crowd has stopped predicting a recession. The consensus has not shifted to "inflation is here to stay". A few people predicting higher inflation does not change the consensus. The consensus is vastly and overwhelmingly on the side of disinflation, a slowing economy (variable lags), and lower rates and lower inflation over the long term. If that is your position, you are with the crowd. The crowd is usually right but you are not bravely fighting the consensus. 

 

For instance consider the consensus (from Nick Timiraios of WSJ):

[Gregmal]

23 minutes ago, ratiman said:

It's not the case that the recession crowd has stopped predicting a recession. The consensus has not shifted to "inflation is here to stay". A few people predicting higher inflation does not change the consensus. The consensus is vastly and overwhelmingly on the side of disinflation, a slowing economy (variable lags), and lower rates and lower inflation over the long term. If that is your position, you are with the crowd. The crowd is usually right but you are not bravely fighting the consensus. 

 

For instance consider the consensus (from Nick Timiraios of WSJ):

How frequently does the analyst crowd change their positions or arrive at new updates? I don’t know because I don’t follow them because I’ve never found analyst to be good at anything investing related. If they were, they wouldn’t be analysts. 
 

The consensus is probably in the ballpark, finally. It was clear in 2021/22/23/and still 24, that like 75% of the peak CPI inflation was supply chain related and the rest housing and service related. IE fairly little has ANY relation to raised interest rates, and some, like housing, only made worse by it. Slowly it seems many have come around to realizing what should have been obvious from the get go. Where were all those analysts and what were the forecasts in say December 21/22/23? 
 

If there are still people forecasting recessions, when is their credibility totally shot? If there are people who were calling these vicious wage-price spirals or hyper inflation, when do we stop paying attention to them? So much of this nonsensical game has been rinse and repeated, just like COVID, to where it’s hard to imagine why anyone still falls for it. One uptick in COVID cases/inflation data and it’s “rah-rah see the boogeyman is coming” every time, just like clockwork. But the bigger picture isn’t or at least hasn’t changed. This discussion been going on in the random tops and bottoms thread as well as some of the inflation ones. Maybe the bulk of the market has finally gotten to where it should’ve been years ago, but we still have the people who have been wrong about recessions and inflation trying to drum up those animal spirits and it’s just like ok when will they get on with their lives?

 

Bigger picture, does 3 25 bps rate cuts impact ones investing? 0? How about a hike or two? Because if one’s looking out at anything much further than the next few quarters the majority of those things are totally arbitrary and irrelevant but like in mid 2022, if enough of these people scream loud enough we can move the market a little, and they can do the “see I told you so!”s even though virtually nothing they forecast happened…no recession, no housing crisis, no hyper inflation. But when the market endures it’s "bullshit", and because of "mother of all bubbles", and "hopium", and "the election"…just seems like it’s awfully tiring and not too profitable playing these games when there’s plenty of ways to just sit on your ass and make money.
 

 

Edited April 2 by Gregmal

[Gregmal]

Like theres just always this NEED for some sensational story in the markets, on the news, on social media. Its gotta be an omg a recession, spiking inflation, stagflation, housing crash, mega bubble in progress...lately it seems to have devolved into even more head scratching and ultimately silly things like "braces for the CPI" and "frets over rate cuts" and "wondering if its March or June", "waits on Powell"....and IDK, if youre actually concerned with making sound investments, isnt it just kinda OK to be like yea economy will be solid but not spectacular, and inflation 3-4% with some noise month to month...and just leave it at that? 

 

I honestly chalk most of it up to underperforming fund managers and institutional investors who need excuses for why their sophisticated trades dont work, why they cant beat an index, and why they buy stuff that doesnt make sense. 

[ValueArb]

Bloomberg Economics ran a million forecast simulations on the US debt outlook. 88% of them show borrowing on an unsustainable path.

The Congressional Budget Office warned in its latest projections that US federal government debt is on a path from 97% of GDP last year to 116% by 2034 — higher even than in World War II. The actual outlook is likely worse.

From tax revenue to defense spending and interest rates, the CBO forecasts released earlier this year are underpinned by rosy assumptions. Plug in the market’s current view on interest rates, and the debt-to-GDP ratio rises to 123% in 2034. Then assume — as most in Washington do — that ex-President Donald Trump’s tax cuts mainly stay in place, and the burden gets even higher.

Simulations Show Range of Uncertainty Around CBO's Forecasts

10th and 90th percentile results of a million scenarios

Sources: Congressional Budget Office, Bloomberg Economics

With uncertainty about so many of the variables, Bloomberg Economics has run a million simulations to assess the fragility of the debt outlook. In 88% of the simulations, the results show the debt-to-GDP ratio is on an unsustainable path — defined as an increase over the next decade.

 

 

https://www.bloomberg.com/news/articles/2024-04-01/us-government-debt-risk-a-million-simulations-show-danger-ahead?srnd=homepage-americas

 

 

[Blake Hampton]

Does anyone here think that QT will have a big effect on markets? I would think higher long-term rates might cause a lot of damage.

[gfp]

8 minutes ago, blakehampton said:

Does anyone here think that QT will have a big effect on markets?

 

No.  Absolutely not

[Blake Hampton]

3 hours ago, gfp said:

 

No.  Absolutely not

Why?

[changegonnacome]

Don't agree with the view that 3-4% inflation as some kind of new normal is a nothing burger......if it's the new normal going forward you should probably get short the trillions of assets that are pricing in a return to sustainable low 2's inflation......if the Fed throws in the towel and just implicitly or explicitly says hey 3.x% is a pretty good inflation number if we can keep unemployment below 5%....you've got a tonne stuff out there which has to incorporate that inflation drag on the future returns demanded.

 

One thing I do agree with @Gregmal on.....is that Powell has somewhat shown his cards.......he was pretending to be Volker....but he's really Alan Greenspan....cause with relatively limited forward visibility on his actual 2% target being achieved......he started hitching up his skirt and talking about rate cuts....and so he's going to use his dual employment mandate as a reason, at any sign of trouble, to start cutting I think.......and he might get away with it...in some respects the dual mandate has codified the Fed put...the progress on inflation has been impressive without a weakening in economic fundamentals to achieve it.........I fundamentally misjudged productivity....both underlying innovation productivity and the secret productivity gains that came post COVID from illegal & legal immigration ramping up again which have been the hidden secret of the domestic deflationary wins we've had....that and China's economic woes exporting large disinflationary forces to the rest of the world but the USA most strongly helping on the import side. Not sure if its enough to get us to two.....but getting to mid-3's with this little economic should be something to be thankful for.

 

It's kind of upside down world.....turn on the TV.......and its the crisis at the southern border....Crisis? You mean the one that keeps sending industrious young people North who want to have families and are lining up to work on construction sites, clean drains, bus tables and generally work like three jobs in an economy/country thats sparsely populated, resource rich and fundamentally short labor while the rest of the world is facing demographic collapse & a kind of endemic laziness & lack of industriousness.....or maybe its Cold War 2.0 'crisis' with our enemy China?......the enemy that is exporting a tonne of goods disinflation to us now and accepting printed dollars in exchange for those very real goods they send....all from a sovereign fiscal authority that is printing 7% annual budget deficits in economic good times with a debt to gdp of 120%.....I mean lots of countries would love to a couple of crisis like that going on simultaneously.

[gfp]

5 hours ago, changegonnacome said:

It's kind of upside down world.....turn on the TV.......and its the crisis at the southern border....Crisis? You mean the one that keeps sending industrious young people North who want to have families and are lining up to work on construction sites, clean drains, bus tables and generally work like three jobs in an economy/country thats sparsely populated, resource rich and fundamentally short labor while the rest of the world is facing demographic collapse & a kind of endemic laziness & lack of industriousness.....or maybe its Cold War 2.0 'crisis' with our enemy China?......the enemy that is exporting a tonne of goods disinflation to us now and accepting printed dollars in exchange for those very real goods they send....all from a sovereign fiscal authority that is printing 7% annual budget deficits in economic good times with a debt to gdp of 120%.....I mean lots of countries would love to a couple of crisis like that going on simultaneously.

 

Don't get me started...  

[Dinar]

6 hours ago, changegonnacome said:

Don't agree with the view that 3-4% inflation as some kind of new normal is a nothing burger......if it's the new normal going forward you should probably get short the trillions of assets that are pricing in a return to sustainable low 2's inflation......if the Fed throws in the towel and just implicitly or explicitly says hey 3.x% is a pretty good inflation number if we can keep unemployment below 5%....you've got a tonne stuff out there which has to incorporate that inflation drag on the future returns demanded.

 

One thing I do agree with @Gregmal on.....is that Powell has somewhat shown his cards.......he was pretending to be Volker....but he's really Alan Greenspan....cause with relatively limited forward visibility on his actual 2% target being achieved......he started hitching up his skirt and talking about rate cuts....and so he's going to use his dual employment mandate as a reason, at any sign of trouble, to start cutting I think.......and he might get away with it...in some respects the dual mandate has codified the Fed put...the progress on inflation has been impressive without a weakening in economic fundamentals to achieve it.........I fundamentally misjudged productivity....both underlying innovation productivity and the secret productivity gains that came post COVID from illegal & legal immigration ramping up again which have been the hidden secret of the domestic deflationary wins we've had....that and China's economic woes exporting large disinflationary forces to the rest of the world but the USA most strongly helping on the import side. Not sure if its enough to get us to two.....but getting to mid-3's with this little economic should be something to be thankful for.

 

It's kind of upside down world.....turn on the TV.......and its the crisis at the southern border....Crisis? You mean the one that keeps sending industrious young people North who want to have families and are lining up to work on construction sites, clean drains, bus tables and generally work like three jobs in an economy/country thats sparsely populated, resource rich and fundamentally short labor while the rest of the world is facing demographic collapse & a kind of endemic laziness & lack of industriousness.....or maybe its Cold War 2.0 'crisis' with our enemy China?......the enemy that is exporting a tonne of goods disinflation to us now and accepting printed dollars in exchange for those very real goods they send....all from a sovereign fiscal authority that is printing 7% annual budget deficits in economic good times with a debt to gdp of 120%.....I mean lots of countries would love to a couple of crisis like that going on simultaneously.

What world do you live in?  In NYC, these "industrious" young people are busy standing in line for free food, get free housing and healthcare, crowd out hospital emergency rooms, their kids crowd out schools, and they are busy committing crimes.  Most of these young people also don't have any skills.  These are not Chinese/Russian PhDs in math/computer science/biology/chemistry or Ukrainian/Polish plumbers/electricians/carpenters.

[gfp]

I knew it was coming and Dinar did not make us wait for long.  Take a trip out of New York City Dinar.  There's a whole country full of hard working Latino immigrants out there literally building the country.  It doesn't make sense to send them to NYC.  That was a political stunt.  Let them naturally flow to where they are needed and have family support systems.

[Gregmal]

@Dinar you left out free prepaid debit cards!

 

All in all I do agree though that literally once you get out of the lawless cesspools like NYC, these people generally contribute positively. One of the cool aspects of our annual winter break down the east coast is seeing a lot of cool places. We drive cuz its easier with the kids...do a few nights wherever, say Richmond, Hilton Head, Savannah, Raleigh, Knoxville....before going through Florida, which in and of itself is big and diverse. So much of the cool and happening places are an amalgamation of "people" coming together to make it work. Thats almost universal. Where things are gross? This shithubs like NYC, Baltimore/DC, etc....AND....cranky old rural white people areas where they think everyone is coming to take their....IDK what lol. 

[Dinar]

55 minutes ago, gfp said:

I knew it was coming and Dinar did not make us wait for long.  Take a trip out of New York City Dinar.  There's a whole country full of hard working Latino immigrants out there literally building the country.  It doesn't make sense to send them to NYC.  That was a political stunt.  Let them naturally flow to where they are needed and have family support systems.

The country does NOT need unskilled labor.  Immigration depresses wages and raises housing costs.  We have plenty of unskilled people on welfare who can do these jobs.   There are hundreds of millions of unskilled people in Africa, Latin America, Arab world, Pakistan, Indonesia, Bangladesh, Afghanistan.  You want all of them here?  There are millions of Haitians who ruined their country, what will happen to the US if they come here?

Edited April 3 by Dinar

[Jaygo]

34 minutes ago, gfp said:

I knew it was coming and Dinar did not make us wait for long.  Take a trip out of New York City Dinar.  There's a whole country full of hard working Latino immigrants out there literally building the country.  It doesn't make sense to send them to NYC.  That was a political stunt.  Let them naturally flow to where they are needed and have family support systems.

I think the latinos are the secret sauce of America. Its one of the reasons American is generally cleaner than Canada. ( landscapes, public bathrooms, rest stops, restaurants ect. Canada needs more of them badly.

 

I grew up in a big employer household so had the opportunity to see all sorts of characters. I started work around 10 since I was desperate for cash and have been surrounded by "labour" for the past 30 years. Central Americans and Mexicans outwork, out think, live cleaner and do a better job in most tasks than their Canadian White, Italian, Indian, Southern South American and most European counterparts by far. 

 

Ill never forget on big crew jobs the Whities would all go out for fast food at lunch and then be lazy as hell for the next two hours. The Costa Ricans, Mexicans and Columbians would all bring their eggs, beans and rice in a thermos eat for 15 minutes and be right back at work. 

 

They got twice the work completed with better quality and wouldn't gripe about how bad their lives are like the others. And yes I am stereotyping but man after 30 years of the same bullshit and now dealing with Natural born Canadian youth I would love some more latinos in my life. Others are talking about crime and food line ect and I would probably say that is more of a structural issue as opposed to cultural. If you advertise free food, and welfare you will attract the people who want that. Just ask Canada with our insane social programs that kill motivation and productivity. 

[Red Lion]

57 minutes ago, Dinar said:

What world do you live in?  In NYC, these "industrious" young people are busy standing in line for free food, get free housing and healthcare, crowd out hospital emergency rooms, their kids crowd out schools, and they are busy committing crimes.  Most of these young people also don't have any skills.  These are not Chinese/Russian PhDs in math/computer science/biology/chemistry or Ukrainian/Polish plumbers/electricians/carpenters.

You should come check out California. I feel like the immigrants are the only ones working. Often under the table for cash. Mostly these are Central American immigrants. 
 

It’s funny that you bring up Ukrainian carpenters, we have had an influx to the Sacramento area, and I’m looking to hire one that does the most incredible custom parquet floors I’ve ever seen. 
 

All of this is anecdotal, it’s funny to me that we are seeing such different sides of the coin here both living in progressive hotbeds. 
 

I’m all for more legal immigration of people that want to work, have kids, learn English, and pay their taxes. 
 

This system we have encourages illegal immigration, tax fraud, and population migration to/from the “sanctuary” states. Still we need immigrants, and unskilled ones at that as long as they’re willing to work. The amount of home health care and trades workers needed in this country over the next decades requires lots of unskilled immigration, and demographics require it too unless Gen Z wants to start working real jobs and procreating (both unlikely). 

[gfp]

Yes, today's "unskilled" labor hauling packs of shingles up an extension ladder on his shoulder is tomorrow's "skilled" roofer.  Yes, we need the kid who carries the shingles up the ladder.  No, the kid who carries the shingles up the ladder isn't going to ruin your country.

[Jaygo]

3 minutes ago, Dinar said:

The country does NOT need unskilled labor.  Immigration depresses wages and raises housing costs.  We have plenty of unskilled people on welfare who can do these jobs.  

The country needs hardworking people who are not ashamed to get their hands dirty. Skills come fast when you not a lazy hungover pos or too "good" to do certain jobs.

 

I was personally shoveling out commercial sump pits last night at 11pm in the rain while my net worth is probably a few million. F..k skills man, we need men and women who get shit done no matter what!! Not to toot my own horn but I got down in the pit, not my guys. I want to show them what it takes so next time they talk about get rich quick schemes and ask for a day off I can reference that hard work and a bit of luck is what's needed if they want to get out of Moms basement.