Exactly
Once the election is over it’ll be “Katy bar the door”!!
And that includes everything!
They will have nothing left to lose . . . . . . at least for a while.
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Investors who are old enough to remember the 1970s point to it as a decade of high inflation, but that is only with the benefit of hindsight. At the start of that decade, investors had no reason to believe that they were heading into a decade of higher inflation, and initial signs of price increases were attributed to temporary factors (with OPEC being a convenient target). In fact, expected inflation lagged actual inflation through much of the decade, and the damage done to financial asset returns that decade came as much from actual inflation being higher than expected inflation, period after period, as from higher inflation.
And hence stock prices go down
In equity markets, the shift in expected returns has been significant, perhaps even dramatic, as the expected return on stocks, which started 2022 at 5.75%, has moved above 8% for the first time since May 2019, with some of that shift coming from a higher treasury bond rate (1.51% to 2.89%) and some of it coming from a higher equity risk premium (4.24% to 5.14%).
Scenarios
As you can see, the range of values is immense and they include scenarios ranging from the upbeat to the catastrophic. At one end of the spectrum, in the most benign scenario, which I will title Much Ado about Nothing, inflation turns out to be transient, fears of economic collapse are overstated and the equity risk premium reverts back towards historic norms, and the market looks under valued, perhaps even significantly so. At the other end, in perhaps the most malignant scenario, titled T he Seventies Show , inflation continues to rise, even as the economy goes into recession and risk premiums spike, leading to a further correction of close to 50% in the market. In the middle, the Volcker rerun , Jerome Powell discovers his inner central banking self, cracks down on inflation and wins, but does so by pushing the company into a deep recession, making himself extremely unpopular with politicians up for election and the unemployed. There is a fourth possibility, where you Live and let live (with inflation) , where we (as investors and consumers) accept a higher inflation world, with its costs and consequences, as the price to pay to keep the economy going.
One of the costs that come with the last scenario is that inflation eats away at trust in not just currencies, but in all financial assets, and that investors will turn away from stocks and bonds. In the 1970s, the asset classes that benefited the most from this flight were gold and real estate, and the question is which asset classes will best play this role now
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That simple math conveniently and simply forgets that a whole lot of debt has a fixed interest rate.
Nothing is safe forever. Credit card rates are typically floating rate linked to Prime, treasury and muni debt matures and needs to be refinanced at prevailing rates, unprofitable or marginal companies will go bankrupt when they can’t refi their 2025-2026 maturity debts from the last few years of boom times, etc. Fixed rate terms buys those borrowers a few years, but after that they need to show they’ve adapted to the new environment and, for example, have enough pricing power to maintain profitability and debt service or else they won’t get new debt, and if they’re that marginal, they probably can’t repay a big debt at maturity, and there goes the equity. Today’s casualty AFI -
Armstrong Flooring Inc., a publicly traded manufacturer founded in 1860, has filed for bankruptcy, saying it couldn’t raise prices enough to counter supply-chain disruptions and higher costs for materials and transportation.
Chief Executive Officer Michel Vermette said in court papersArmstrong last year sought to raise prices by up to 10% for residential products and 15% for commercial products. But profit margins were still narrowed by product and transportation cost increases of $85 million in 2021 alone, he said.
“The company’s increasing costs significantly outpaced its pricing power,” Mr. Vermette said.
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A fixed rate only matters when you pay off the debt before the fixed rate expires. The new debt cost doesnt immediately jump $890B, but over time it does as new loans replace old loans.
Sri Lanka is facing “fiery but mostly peaceful” protests, not yet similar to the ones outside our Supreme Court Justices homes. The finance minister resigned and they’re destined for bankruptcy eminently and revolution.
Food and gas price riots don’t end well.
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Sri Lanka has been controlled by a family, the Rajapaksas, for several years. Father, son, uncle,…, in total 5 members of the family had cabinet positions including the president and prime minister. They’re corrupt and through graft stole substantial amounts of money. Lankans’ troubles aren’t just because of recent inflation in energy or food prices.
Sure. But over time money loses value with inflation also. And I think the point they were making is that the country might not be able to absorb such a “shock,” but it won’t be a shock if the debt service increases slowly over time.
so all those here who were around in the 70’s what say ye?
but current inflation makes it worse for the common man, esp in developing countries. Food insecurity is a big issue. Not like here in US
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Yeah, those guys have run Sri Lanka for a while, but they only start resigning and getting their homes burned down when the food and fuel prices blow up and the people start rioting in earnest. Inflation is the match that’s gonna burn a lot more places before our sanctions are over.
Meanwhile, on the home front, maybe we’ll find out whose side the current admin is on - the union dockworkers causing the supply chain mess with their crazy high wages and refusals to use automation that would cost jobs, or the common person who’s paying the price.
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So many American lives are being harmed by this. Yet 35-40% of the people continue to support Biden.
What is WRONG with these people!!?
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Unlike earnings lately, something is beating expectations!
- US Apr Consumer Prices 0.3%; Consensus 0.2%
- US Apr CPI Ex-Food & Energy 0.6%; Consensus 0.4%
- US Apr Consumer Prices Increase 8.3% From Year Earlier; Core CPI Up 6.2% Over Year
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It’s all bad. But that core number is absolutely KILLER!
Biden: “Blame Russia. Blame COVID. It’s not my fault!”
Don’t Blame You; Don’t Blame Me: Blame the Fellow Behind the Tree!
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To be fair, those events are the catalysts for today’s prices. But while some want to insist it was inevitable, it was our reaction to those events that created these consequences, not the events themselves.
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lots of nice charts on inflation care of Wells Fargo, specifically focused on the April CPI just released.
https://wellsfargo.bluematrix.com/links2/html/0408e193-cb9e-494a-a5a0-b7648508428b
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Trump tried to subvert our democracy after losing the election. Yet some significant percentage of the people continue to support him.
What is WRONG with these people!!?
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Initial reaction - talk is cheap. I then read the article and was astounded to read …
Back then, he said during a panel chat with Minneapolis Fed President Neel Kashkari, the central bank talked tough on inflation but wilted every time tighter monetary policy caused an uptick in unemployment.
Waller said he thinks the economy can withstand the path of rate hikes this time that will be much gentler than the Volcker era.
“The labor market is strong. The economy is doing so well,” he said. “This is the time to hit it if you think there’s going to be any kind of negative reaction, because the economy can take it.”
So, from the above 3 paragraphs,
- The 70’s central bank stopped raising rates when they caused unemployment.
- The 20’s central bank will raise rates gently and the economy is strong enough to withstand negative reactions.
This sounds like the 20’s central bank will raise rates until it causes a negative reaction (higher unemployment?, economic slowdown?, bear market?) that the economy can’t handle. That’s the same thing the 70’s central bank did.
I realize the central bankers have a tightrope to walk. That’s what the 70’s central bankers tried to do, failing miserably. No, they didn’t have a super strong economy, but it wasn’t exactly dead, either.
I’m not gonna defend Trump. He admittedly has a few screws loose. And I’ve already told you I think he is a putz.
But this is the inflation thread, not a political thread. I believe the people who support Trump do so because they support his POLICIES, not necessarily because they admire him as a person.
Under Trump, and because of his policy choices, America had a chance. There was no new war. Putin and Kim remained quiescent. The border was coming under control. And perhaps most important:
Inflation was not raging.
In addition, a key element of Trump’s policy, 100% cast aside by Biden, was American energy independence. That policy alone underlaid many of our good outcomes during Trump’s four years.
So, yes you’re right, Trump had and continues to have in my view, plenty of warts, mostly personal. But no negatives under Trump even approach our current catastrophe with Biden. This is why Biden’s approval right across the board is so abysmal, and why Democrats are dreading the November midterm elections.
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