Peak Inflation Is Not The Issue

[Ptarmigan]

Peak Inflation Is Not The Issue
https://pentoport.com/category/in-the-news/

The reality of record-high inflation combined with a hawkish monetary policy is slowing the economy sharply and has led to the current U.S. recession—two back-to-back quarters of negative growth. The economic contraction should soon cause inflation to roll over along with bond yields, but that isn’t necessarily indicative of a new bull market. It is much the same process that occurred leading up to the Global Financial Crisis of 2008.

The major difference is that the level of inflation today is much greater than it was 15 years ago–a white-hot 9.1% for June of 2022, which is actually close to 20% if calculated using the same method back in 1980. That level is much greater than the 4.1% in December of 2007. Inflation may be peaking, but it is peaking at over 4.5x greater than the Fed’s target. Meaning, the FOMC will find it very difficult to give up its inflation fight anytime soon. It would be a different story if the Effective Fed Funds Rate was trading close to the Fed’s neutral range, which Mr. Powell believes is close to 2.5%, not the 1.58% seen today. With CPI at 9.1% and its balance sheet at $8.9 trillion, it is untenable for the Fed to remain stimulative to inflation. Indeed, the FOMC wants the interbank lending rate at 3.5-4.0% by the end of 2022.

Nevertheless, the apogee of CPI is probably here; and a falling 2nd derivative of inflation would be great news for the stock market as long as it didn’t also come along with crashing economic growth. And, if the Fed were to slow down hiking rates, or even stop hiking completely, it would not necessarily be a panacea. During the last three recessions, the Fed had to significantly reduce interest rates and/or undergo Quantitative Easing programs to boost the market. Even after taking on such monetary endeavors, the results were not immediately manifest. During the Dot.com recession, the Fed had to reduce borrowing costs by 475 bps before the market bottomed—that process took nearly two years. During the GFC, the Fed took rates down by 525 bps before stocks found support—that process took a year and a half and was aided by a massive Q.E. program. And even during the outbreak of the COVID-19 pandemic, it took the start of unlimited Q.E. and a return to ZIRP before markets turned around. Newsflash for Wall Street: Monetary policy works with a rather long lag.

Can one honestly compare today’s situation with the debt levels and asset bubbles in existence leading up to the Tech and Real Estate bubbles? No, the current situation is actually much worse. See my commentary here for more data on our hyper-leveraged economy.

The true inflation rate is likely around 20%. We maybe at the peak. Regardless, peak inflation is the tip of the iceberg.

[Eupher]

Most of this finance stuff makes my head hurt, especially with acronym-laden articles like this.

FOMC - https://www.thebalance.com/federal-open-market-committee-fomc-3305987

CPI - consumer price index.

quantitative easing - https://www.investopedia.com/terms/q/quantitative-easing.asp

bps - basis points. https://www.investopedia.com/terms/b/basispoint.asp

GFC - Global Financial Crisis. That period between 2008/2009 that we remember so well.

ZIRP - Zero Interest Rate Policy. The Fed is moving to increase interest rates, albeit very slowly.

[Eupher]

From OP's article, and more toward the bottom line of it quoted below. The usual criminals - SharterJoe and Yellen - want to tell you that the sun rises in the west and sets in the east.

 

President Joe Biden, Treasury Secretary Janet Yellen, the entirety of the money printers who inhabit the Federal Reserve, and virtually all of the deep state of Wall Street are still busy trying to convince you that a recession is unlikely. Well, here’s some news for all of them. Whether or not we will have a recession is no longer a question. The recession is already here. The only question is, how deep the recession will become.

The consumer is getting attacked on all fronts, and their consumption accounts for nearly 70% of GDP. Falling real wages, spiking debt service costs, plunging cryptocurrencies, sinking stock prices, and battered bond values are seriously injuring their financial health. And coming soon to a theater near you, a real estate wreck is in the offing. Instead of home prices rising 20% per annum as they have over the last couple of years, the pace of home price appreciation should soon decline sharply. Home affordability is at a record low, while new listings and price reductions are on the rise. Home equity extractions have been severely depressed due to rising mortgage rates. And now, depreciating real estate values shut down the bad consumer habit of relying on equity extraction to boost consumption.

The final blow to this consumption story will be the labor market. A rising number of US corporations are now placing hiring freezes and/or engaging in outright layoffs.

[Ptarmigan]

Most of this finance stuff makes my head hurt, especially with acronym-laden articles like this.

FOMC - https://www.thebalance.com/federal-open-market-committee-fomc-3305987

CPI - consumer price index.

quantitative easing - https://www.investopedia.com/terms/q/quantitative-easing.asp

bps - basis points. https://www.investopedia.com/terms/b/basispoint.asp

GFC - Global Financial Crisis. That period between 2008/2009 that we remember so well.

ZIRP - Zero Interest Rate Policy. The Fed is moving to increase interest rates, albeit very slowly.

Those acronyms can be overwhelming.

[freedumb2003b]

Those acronyms can be overwhelming.

Or TACBO