Fed can't keep the rates low

[thepupil]

we seem to be flipping between inflation and rates (which are obviously related), but one data point re childcare.

 

the cost of childcare (albeit for those fancy enough to have a nanny which is not the general populace) is up 25%+ in DC area (in 1 year)

 

if you're the typical yuppie scum household in our area, a $1mm house pre-covid is now $1.2mm and has 2x the offers/more competitive, and the nanny you were paying $20/hr ($44K/yr if you don't pay under the table), is now $60K/year.

 

these are obviously rich people (or at least high earning people) problems, but there's definitely plenty of covid impacted stresses on the supply chain, whether that be lumber or nannies or whatever. TBD as to whether post-covid sees some mean reversion.

 

https://www.whitehousenannies.com/for-families/salaries-fees/

On average, nannies in the DC area charge $20-$25/hour – since COVID, we’ve seen the market shift to $25-30/hr due to the highly competitive nature of the market.

[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.

 

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.

 

I agree we need to be prepared for both probabilities:

• Probability that inflation/interest rates rise to reflect the increase in minimum wage & total money deposited in people's accounts
  
• Probability that interest rates stay lower than inflation we are seeing around us for goods/services we consume today
  

[wabuffo]

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.

 

 

wabuffo

[LearningMachine]

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.

 

 

wabuffo

 

Wabuffo, my apologies for not providing full context here.  I think we had this conversation happening in the thread here: https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/m2-money-supply-growing-at-28-4/msg445679/#msg445679. 

 

On that thread, you agreed it is a correct understanding of your perspective that the Federal Reserve is like a Recorder's office where money is locked up and all that can happen is money can move around but you can't take money out of the Federal Reserve.

 

Would love to hear your thoughts on that thread to make sure I understand deeper your perspective.

[wabuffo]

...the Federal Reserve is like a Recorder's office where money is locked up and all that can happen is money can move around but you can't take money out of the Federal Reserve.

 

part of this statement is ok, but a lot of it is incorrect. 

 

The Federal Reserve is a bank -- the US Treasury's bank. The US Treasury 'owns' the equity of the Federal Reserve.  It exists to manage payments between banks and other banks and also between banks and the US Treasury.  The Fed has a simple mission -- make sure every payment in the United States financial system clears without failure. 

 

To do this the banks and the US Treasury have "checking accounts" at the Fed.  Yes - these are electronic deposits and its an electronic ledger.  The amount that banks must keep in these accounts is determined by Fed policy (ie, the Fed used to allow 'daylight' overdrafts so banks used to keep very little at the Fed; now they are not allowed so banks must keep more on deposit) -- just like a private sector bank account. 

 

Lately (well for over a decade now) -- the Fed has also given itself another mission: buy Treasury assets and credit the banks' "checking accounts" when it purchases them.

 

Finally, you and I don't get accounts at the Fed.  Only banks do.  But if the US Treasury needs to send us a stimulus direct deposit - it manages the payment by asking the Fed to move electronic deposits to our bank which means our banks' reserve account.  This creates the deposit for us (and a reserve balance for our bank).

 

- so reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve.

- the Fed through its policies and its purchases controls the total amount of reserves in the system (in aggregate banks do not control this).  The Fed does this because it believes it is lowering long-term interest rates.

- US Treasury spending, taxing and issuance of debt also moves reserves between the banks and the US Treasury's general account.

 

There may be a few other things I may have forgotten - but that's the gist of it.  The Fed is more than a "recorder" -- it is a bank.  A special bank set up by the US Federal Government but a bank nonetheless.

 

wabuffo

 

 

[Cigarbutt]

we seem to be flipping between inflation and rates (which are obviously related), but one data point re childcare.

the cost of childcare (albeit for those fancy enough to have a nanny which is not the general populace) is up 25%+ in DC area (in 1 year)

if you're the typical yuppie scum household in our area, a $1mm house pre-covid is now $1.2mm and has 2x the offers/more competitive, and the nanny you were paying $20/hr ($44K/yr if you don't pay under the table), is now $60K/year.

these are obviously rich people (or at least high earning people) problems, but there's definitely plenty of covid impacted stresses on the supply chain, whether that be lumber or nannies or whatever. TBD as to whether post-covid sees some mean reversion.

https://www.whitehousenannies.com/for-families/salaries-fees/

On average, nannies in the DC area charge $20-$25/hour – since COVID, we’ve seen the market shift to $25-30/hr due to the highly competitive nature of the market.

An interesting aspect is that the inflation you are facing depends on where you are in the food chain. Inflation is the net result of a wide array of conflicting forces.

Covid simply accentuated previous trends and you will notice that labor intensive items and services items have shown higher inflation patterns. Child care (from basic to specialized nannies) inflation has typically outpaced inflation by 1-2% per year and this has compounded over time. My youngest one (14) will start babysitting this year and the hourly rate has followed a similar trajectory than the Tooth Fairy curve over the last few years, similar to child care overall.

For housing inflation 2020-version which is mentioned in this thread, this has been a record year. It appears that the bottom 60% have used cash payments to reduce their credit card lines and the top 20% have saved and invested in various assets, including houses.

-----

So, the inflation/deflation debate is one of equilibrium with very strong and often opposing forces. A remarkable aspect that manifested over the last 12 years has been the very high amount of debt issued by the government (with the Fed cooperation) which has not, at least so far, despite almost consensus expectations, resulted in higher inflation. Obviously this may change but Japan is stuck in the same predicament and has not 'succeeded', up to this point (i think their window of opportunity has closed).

[Spekulatius]

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.

 

 

I haven’t read the book, but We had studied this period in history courses in Grammar school and I actually heard Forst hand accounts from my grandparents.

Germany actually had two hyperinflation periods one after WW1 and another one during and after WW2.

 

In both cases, the economy evolved into a barter economy, Those poor souls that lived from a salary and got paid In cash would run to the sore when they got their pay and buy good right away, so money velocity would go way up.

For many (including some workers who would get paid in goods) the economy evolved into a barter economy where instead of cash, good were used as a medium of exchange and store of value. After We2 those were famously cigarettes, but anything food or boozy would work almost as well.

 

So there is always and alternative, it is just a matter how convenient and efficient it will be. I think now it may be gold,  Bitcoin or foreign currencies like Euro or Swiss Franc if the USD fails.

 

The other thing if note is the reflexivity of hyperinflation. If most people loose the trust in the currency then the currency is toast. a it was one of Hjilmar Schacht masterstroke  to reverse this and issue a Rentenmark which really was nothing else than the former Reichsmarks with 9 zeros scratched out. However he could convince the populace that the way forward would be different and that was enough to break the reflexivity patterns (in addition, the printing presses would go way slower) which is really remarkable considering how far things were gone.

 

FWIW,I think Powell made a mistake stating they he would run inflation hot for a while. I think Greenspan’s “Oracle” talk would be better as everyone interpreted what he stated it the way they like and he could do as he pleased without contradicting  himself and losing credibility.

[valueorama]

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.

 

wabuffo

 

Would destruction of service economy(+ to some extent industrial production) not just in US but worldwide impact inflation?

 

[Cigarbutt]

...

So there is always and alternative, it is just a matter how convenient and efficient it will be. I think now it may be gold,  Bitcoin or foreign currencies like Euro or Swiss Franc if the USD fails.

The other thing if note is the reflexivity of hyperinflation. If most people loose the trust in the currency then the currency is toast. a it was one of Hjilmar Schacht masterstroke  to reverse this and issue a Rentenmark which really was nothing else than the former Reichsmarks with 9 zeros scratched out. However he could convince the populace that the way forward would be different and that was enough to break the reflexivity patterns (in addition, the printing presses would go way slower) which is really remarkable considering how far things were gone.

...

There is a chapter on Dr. Schacht. Your explanation is reasonable but the way Germany came out the other end remains bewildering.

Anyways, they had this to say about him:

"Dr Schacht sat in a single room which had once been used as a charwoman's cupboard, looking on to a backyard in the Ministry of Finance. From this post he transformed the German financial system from chaos to stability in less than a week. His secretary, Friiulein Steffeck, was later asked to describe his work as commissioner: What did he do? He sat on his chair and smoked in his little dark room which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal — he telephoned in every direction and to every German or foreign place that had anything to do with money and foreign exchange as well as with the Reichsbank and the Finance Minister. And he smoked. We did not eat much during that time. We usually went home late, often by the last suburban train, travelling third class. Apart from that he did nothing."  [my bold]

 

In an investment world with the there-is-no-alternative reflating mentality, it's interesting to consider the perspective of alternatives for the USD:

-% of foreign exchange reserves: ~60%

-% of forex transactions: ~90%

-% of global debt issued: ~40-45%

-% international trade currency: 50-55%

-50% of the currency circulating outside the USA

-the Federal Reserve has effectively become the central bank of the world (swap lines etc)

 

i'm not sure about all this but from experience being in Cuba (as CDNs, we are allowed to), the alternative is NOT the CDN 'dollar'.

[LearningMachine]

...the Federal Reserve is like a Recorder's office where money is locked up and all that can happen is money can move around but you can't take money out of the Federal Reserve.

 

part of this statement is ok, but a lot of it is incorrect. 

 

The Federal Reserve is a bank -- the US Treasury's bank. The US Treasury 'owns' the equity of the Federal Reserve.  It exists to manage payments between banks and other banks and also between banks and the US Treasury.  The Fed has a simple mission -- make sure every payment in the United States financial system clears without failure. 

 

To do this the banks and the US Treasury have "checking accounts" at the Fed.  Yes - these are electronic deposits and its an electronic ledger.  The amount that banks must keep in these accounts is determined by Fed policy (ie, the Fed used to allow 'daylight' overdrafts so banks used to keep very little at the Fed; now they are not allowed so banks must keep more on deposit) -- just like a private sector bank account. 

 

Lately (well for over a decade now) -- the Fed has also given itself another mission: buy Treasury assets and credit the banks' "checking accounts" when it purchases them.

 

Finally, you and I don't get accounts at the Fed.  Only banks do.  But if the US Treasury needs to send us a stimulus direct deposit - it manages the payment by asking the Fed to move electronic deposits to our bank which means our banks' reserve account.  This creates the deposit for us (and a reserve balance for our bank).

 

- so reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve.

- the Fed through its policies and its purchases controls the total amount of reserves in the system (in aggregate banks do not control this).  The Fed does this because it believes it is lowering long-term interest rates.

- US Treasury spending, taxing and issuance of debt also moves reserves between the banks and the US Treasury's general account.

 

There may be a few other things I may have forgotten - but that's the gist of it.  The Fed is more than a "recorder" -- it is a bank.  A special bank set up by the US Federal Government but a bank nonetheless.

 

wabuffo

 

Thank wabuffo, we are on the same page that the Fed is more than just a Recorder.  I had added more functions beyond Recording with the analogy at https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/m2-money-supply-growing-at-28-4/msg445679/#msg445679.

 

We are also on the same page that you and I can't have accounts at Fed Reserve (:-)) and only banks can have accounts at Fed Reserve. 

 

Is my understanding correct that your perspective is that we don't need to worry about inflation because "reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve"?

[dpetrescu]

So shouldn’t the 10year rate heading towards 2% and the curve steepening be a good thing - a sign of a healthy market? Typically, almost all recent recessions happened a little after the 10 minus 2 year went under 0. This has been a surprisingly good indicator for the last 4 maybe 6 recessions. Using the 10 minus 2 resulted in surprisingly almost no noise. It was a leading indicator by months. Maybe the only One false indicator was July 1998.

 

A fast rising steepening of 10 minus 2 happened after each recession. After the dot com recession it quickly rose to a difference of 2% -3%. It did that after every recession since the 70s, in every case rising quickly out of a recession yowards 2-3% difference. And in most cases in the past the Dow was rising (post 92 recession) or consolidating (post dot com) as the yield steepening was happening.

 

So why are markets panicking now if it’s a common symptom coming out of a recession? Is it a case of this time it’s different? How is it different?

 

https://fred.stlouisfed.org/series/T10Y2Y

 

Anyone have a way to generate the inflation adjusted Dow over this?

[widenthemoat]

As Charlie Munger puts it, this is a Mad Hatter's Tea Party. The economic outlook was horrible Spring/Summer 2020, but markets boomed because interest rates were forced lower. Now, the economy is starting to show shines of improvement, but with rates rising the market is coming back down to reality. The general market doesn't even care about fundamentals anymore, the only variable in their buy/sell equation is interest rates. It's banana-land in my opinion, and is going to end terribly.

[stahleyp]

Alright so I'm throwing this out there as a "what if".

 

So, what if gold isn't reflecting inflation because gold is typically purchased by people with wealth? So, there wasn't much real world inflation after 2008 because of monetary policy (you can see the inflation in asset prices though). However, this time it's more of a fiscal policy so the average person has money (which is why you're seeing inflation in consumer goods vs gold). Like I said, I could be totally off base with this but there it is.

[wabuffo]

thank wabuffo, we are on the same page that the Fed is more than just a Recorder.  I had added more functions beyond Recording with the analogy

 

This short paper might help - its a good overview of modern central bank operations.  It was written before the Fed significantly expanded its balance sheet but the principles still hold.  I think you will find it informative even if you just scan the ten principles only.

 

https://core.ac.uk/download/pdf/207650683.pdf

 

wabuffo

[JRM]

This is probably not right at all, but in my mind ever since the Greenspan days the inflation has been observed for things that wealthy people buy: health care, college tuition, and 401k assets.  Now that helicopter money is available I think we're going to see inflation in things that everybody buys.  If you give money to wealthy people they save it, if you give money to poor people they spend it.

 

I'm also confused with how economists define inflation.  A rare few say inflation is literally an expansion of the money supply; in which case M2 should be a leading indicator of inflation depending on velocity.  Most people seem to conclude that inflation is an increase in prices as indicated by the CPI (makes sense also). 

 

I don't know which direction this goes or when, but the Fed is dead set on creating real inflation at the same time the market doesn't seem at all prepared for rising interest rates.  Should be interesting either way.

[randomep]

So shouldn’t the 10year rate heading towards 2% and the curve steepening be a good thing - a sign of a healthy market? Typically, almost all recent recessions happened a little after the 10 minus 2 year went under 0. This has been a surprisingly good indicator for the last 4 maybe 6 recessions. Using the 10 minus 2 resulted in surprisingly almost no noise. It was a leading indicator by months. Maybe the only One false indicator was July 1998.

 

A fast rising steepening of 10 minus 2 happened after each recession. After the dot com recession it quickly rose to a difference of 2% -3%. It did that after every recession since the 70s, in every case rising quickly out of a recession yowards 2-3% difference. And in most cases in the past the Dow was rising (post 92 recession) or consolidating (post dot com) as the yield steepening was happening.

 

So why are markets panicking now if it’s a common symptom coming out of a recession? Is it a case of this time it’s different? How is it different?

 

https://fred.stlouisfed.org/series/T10Y2Y

 

Anyone have a way to generate the inflation adjusted Dow over this?

 

ya I want sanity and stability...... and most long term investors also would........

[randomep]

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.

 

 

I beg to differ again........

 

Groupthinking to me means, thinking something that doesn't require a lot of imagination, cognitive dissonance, basically brainpower and is repeated over and over.......

 

Let's see, in every fed meeting for the last 12 years (I am sure) inflation fears have come up, that is broadcast around the world.  Inflation fears are brought up by other central banks all over the world too. Republicans in congress are arguing against stimulous because of inflation fears, I think if there is one group of people guilty of groupthink it is the republicans.

 

When I was young, during stagflation in the late 70's there was a lot of talk of another great recession because many people walking around experienced the great depression.  Now many people can easily fear inflation because many have personally experienced stagflation of the 70s.

 

I am not saying inflation won't happen, I am just saying it doesn't take high IQ to think money printing == hyperinflation.

 

On the other hand, understanding why Japan is printing money like zimbabawe and is still experiencing deflation takes superhuman effort.

 

[Cigarbutt]

... It was written before the Fed significantly expanded its balance sheet but the principles still hold.

wabuffo

^Where would interest rates be without the quasi-constant and quasi-permanent central banks’ involvement/support?

Does this matter?

 

-CBs are useful (essential) when using technical tools for the financial plumbing related to settlements.

-CBs are useful (essential) as lenders of last resort (along Bagehot’s rules) but have become automatic lenders of first resort, mostly using technical (and unconventional) tools to achieve their new roles.

-They have been able to sustain a world with permanent excess reserves by paying (technically) interest on excess reserves. This new world (with newer regulatory and capital rules for banks) means banks and the financial system need a very high level of residual excess reserves in the system (this was tested in the fall of 2019).

-Apart from the psychological aspect and the dubious wealth effect, open market operations do not work (transmission), when applied over a long period.

-Money creation in relation to real economic activity is an essential feature but has to be endogenous (private market participants).

 

 

Because of the above, markets now expect constant and permanent support and the whole financial system rests on a low interest rate forever scenario.

In 2021, it is presently assumed that central banks will significantly decrease their bond-buying activity (not in absolute term) in relative terms to the promised funds on the fiscal side. This will depend on what will really happen to the Treasury Account at the Fed but bond-buying is likely to be more (perhaps much more) than anticipated. Expectations about excess reserves in the system should be adjusted. i think they will keep making technical adjustments because it's easier in a way.

However, even if the benefit is questionable, the long-term involvement has caused massive distortions: asset prices, expected returns, leverage and inequality.

Going into the easing mode has been easy. Leaving looks like it will be increasingly harder. When faced with a tantrum, the easy way is to tolerate or pretend but, absent a credible exit strategy, one perhaps should consider proximate causes (at least as a learning exercise and for humility).

 

This massive and quasi-permanent expansion of CBs’ balance sheet through open-market operations will eventually be remembered as one of the greatest historical blunders (opinion). And what will they do now if a real downturn happens? And will they recognize that they were more part of the problem than of the solution?

 

This is probably not right at all, but in my mind ever since the Greenspan days the inflation has been observed for things that wealthy people buy: health care, college tuition, and 401k assets.  Now that helicopter money is available I think we're going to see inflation in things that everybody buys.  If you give money to wealthy people they save it, if you give money to poor people they spend it.

2020 was phenomenal from monetary and fiscal standpoints. Bank loan growth and net worth did not actually decline over the period (both increased markedly). Today’s release of aggregate income, consumption and savings data continues to show unusual developments. When scratching below the surface however, one sees that the bottom 60% have actually dis-saved during this period and 85% of the savings done by the top 40% was done by the top 20%. For inflation purposes, how is that supposed to point to productive growth, a sustainable steep curve, rising real yields AND inflation (until true helicopter money is delivered)?

 

Of course the risk is that the reflation trade is for real this time but there have been many false dawns since the GFC. Another risk is that the MMT crowd is right and simply consolidating the FED with the Treasury would simplify the the-emperor-is-naked perception (perhaps wrong perception?) but i can’t come around (not able to provide the superhuman effort) to this idea given present understanding of the initial motivations that led to the 1913 Federal Reserve Act and continue to believe that there is no free lunch (in the aggregate and compensating for inter-temporal transfers).

[hasilp89]

 

 

I am not saying inflation won't happen, I am just saying it doesn't take high IQ to think money printing == hyperinflation.

 

On the other hand, understanding why Japan is printing money like zimbabawe and is still experiencing deflation takes superhuman effort.

 

Well said.

[LearningMachine]

 

I am not saying inflation won't happen, I am just saying it doesn't take high IQ to think money printing == hyperinflation.

 

On the other hand, understanding why Japan is printing money like zimbabawe and is still experiencing deflation takes superhuman effort.

 

Well said.

 

As Mr. Buffett says, “Investing is not an issue of a high IQ. If you are in the investment business and have an IQ of 150, sell 30 points to someone else. Most wealthy people I know are exceptionally intelligent, but intelligence is not the key to their success. Rather it is their ability to approach investment decisions with a cool head and a steady hand.”

Source:http://silverheights.com/downloads/the-world-of-money/The%20Five%20Traits%20of%20Highly%20Successful%20Investors%20-%20Globe%20and%20Mail%20(1-29-2013).pdf

[LearningMachine]

Inflation fears are brought up by other central banks all over the world too.

 

Looks like your perspective is that it is proof that groupthinking is focused on inflation.

 

On the other hand, my perspective is based on what groupthinking has been doing, i.e. trading treasuries around all-time low yields and trading stocks around all-time low earnings yields, not taking into account risk of inflation showing up.

 

Two different perspectives.  I'm not saying inflation will show up in what CPI measures for sure or will not show up for sure.

 

I'm saying we need to pay attention to both probabilities with a cool head instead of getting fixated on one extreme.

[DooDiligence]

Reddit isn't all WSB

 

"Yesterday's market dump appears to have been triggered by one or more whales forcefully selling $50B of bonds into a reluctant buyer's market. The below is a good article from Bloomberg but it's premium content so I'll summarize it below because it answers the question, Why are bond yields spiking despite the Federal Reserve setting its interest rates to banks so low and WTF is going on in the bond market?"

 

www.reddit.com/r/stocks/comments/lsyfcs/what_caused_stocks_to_dump_yesterday_the/?utm_source=share&utm_medium=web2x&context=3

[randomep]

Inflation fears are brought up by other central banks all over the world too.

 

Looks like your perspective is that it is proof that groupthinking is focused on inflation.

 

On the other hand, my perspective is based on what groupthinking has been doing, i.e. trading treasuries around all-time low yields and trading stocks around all-time low earnings yields, not taking into account risk of inflation showing up.

 

Two different perspectives.  I'm not saying inflation will show up in what CPI measures for sure or will not show up for sure.

 

I'm saying we need to pay attention to both probabilities with a cool head instead of getting fixated on one extreme.

 

Sure there are people that choose to trade and there are those that don't. Does anyone in CoBF trade treasures? I sure don't, I have 1% of my net-worth in bonds and that's only cos it is in a 401k where I have very little else to go to.

 

Or maybe CoBF are just really original thinkers cos they follow Munger and Buffett, who would detest treasuries.....

[dpetrescu]

Alright so I'm throwing this out there as a "what if".

 

So, what if gold isn't reflecting inflation because gold is typically purchased by people with wealth? So, there wasn't much real world inflation after 2008 because of monetary policy (you can see the inflation in asset prices though). However, this time it's more of a fiscal policy so the average person has money (which is why you're seeing inflation in consumer goods vs gold). Like I said, I could be totally off base with this but there it is.

 

Gold has historically been very closely invert correlated with REAL 10 year yields. Take a look at the chart in this video at 6:05. At least for the last couple years.

 

[TwoCitiesCapital]

Alright so I'm throwing this out there as a "what if".

 

So, what if gold isn't reflecting inflation because gold is typically purchased by people with wealth? So, there wasn't much real world inflation after 2008 because of monetary policy (you can see the inflation in asset prices though). However, this time it's more of a fiscal policy so the average person has money (which is why you're seeing inflation in consumer goods vs gold). Like I said, I could be totally off base with this but there it is.

 

Gold has historically been very closely invert correlated with REAL 10 year yields. Take a look at the chart in this video at 6:05. At least for the last couple years.

 

 

/\/\ This is true. I'd add it's not a perfect system though. 2011 was instructive - gold topped and then declined substantially even while real yields didn't bottom until late 2012 and didn't turn positive until mid-2013. So gold topped a whole year before real yields bottomed and a whole 2-years prior to real yields turned positive.

 

I'm wondering if the same thing might be happening again given the recent weakness since August/September even though real yields remained deeply negative and didn't even start "spiking" until ~10 days ago.

 

https://fred.stlouisfed.org/series/DFII10