When will the Fed stop QE and raise rates?

[muscleman]

Right now the FED is still doing massive amount of QE because of high unemployment rate, but we have high unemployment rate with even more job openings than unemployed people is because the government keeps handing out free money and people would earn less if they go to work instead of staying at home. This becomes a catch 22. Does anyone have any insights on when this would end? If this doesn't end, then we will see a historic asset bubble.

[Castanza]

5 minutes ago, muscleman said:

Right now the FED is still doing massive amount of QE because of high unemployment rate, but we have high unemployment rate with even more job openings than unemployed people is because the government keeps handing out free money and people would earn less if they go to work instead of staying at home. This becomes a catch 22. Does anyone have any insights on when this would end? If this doesn't end, then we will see a historic asset bubble.

A lot of the local restaurants where I live are struggling because they cannot get people to work. Many of them have gone to reduced hours and reduced days despite everything being open with virtually no restrictions. 

 

Incentives matter 
 

 

 

 

[Gregmal]

Ive seen similar around me but it just leads to massive price increases. Same as all the concern with sporting events, concerts, theme parks, etc...covid and the restrictions plus follow on effects of all that just created a very easy path to returning and having huge pricing power due to demand characteristics. If people will put in new floors or do additions to their homes when lumber is up 4x from a year ago, they'll pay 50% more for a concert ticket or 30% more for Tex-Mex or Italian food. What triggers people to become price sensitive again is what I am looking at. 

Even as people re-enter the workforce, many of these people are low intellect/skill types. Otherwise they're not collecting benefits. It may create a downward pressure on certain job associated wages, but it most likely won't lead to price decreases to the consumer. Its supply and demand to a degree but once businesses get you willing to pay something they never really relinquish it, especially in todays day and age where industry dominance is very much consolidated. 

Where I lean right now is that you're going to have fast inflation/low rates for a bit, then rates will have to kick up, but again, not crazy high...so maybe 3-5%...and then modest inflation. Some stuff will do better than others obviously. And no, I dont think 6% mortgages kill housing demand, at all. 

[TwoCitiesCapital]

23 hours ago, Gregmal said:

Ive seen similar around me but it just leads to massive price increases. Same as all the concern with sporting events, concerts, theme parks, etc...covid and the restrictions plus follow on effects of all that just created a very easy path to returning and having huge pricing power due to demand characteristics. If people will put in new floors or do additions to their homes when lumber is up 4x from a year ago, they'll pay 50% more for a concert ticket or 30% more for Tex-Mex or Italian food. What triggers people to become price sensitive again is what I am looking at. 

Even as people re-enter the workforce, many of these people are low intellect/skill types. Otherwise they're not collecting benefits. It may create a downward pressure on certain job associated wages, but it most likely won't lead to price decreases to the consumer. Its supply and demand to a degree but once businesses get you willing to pay something they never really relinquish it, especially in todays day and age where industry dominance is very much consolidated. 

Where I lean right now is that you're going to have fast inflation/low rates for a bit, then rates will have to kick up, but again, not crazy high...so maybe 3-5%...and then modest inflation. Some stuff will do better than others obviously. And no, I dont think 6% mortgages kill housing demand, at all. 

Probably won't kill housing demand, housing prices on the other hand? A 30-year mortgage with less than 10% down is like 90% interest on the first few years of payments. A jump in rate from 3% to 6% nearly doubles that monthly payment assuming prices don't move. 

So

1) first time home-buyers get comfortable owning a LOT less house (seems unlikely if we're counting on millennials doing household formation to keep the demand up)

2) first time home buyers get content with paying 50-60% of disposable incomes towards mortgages instead of the 20-30% they typically pay now or

3) transaction volume screeches to a halt and only a handful of buys/sales get made a year from the most desperate buyers/sellers

4) Prices come down some and new build supply goes up some. 

Not sure which of the 4 is more likely, but doesn't really sound super positive for any of them, right? 

I'm also skeptical of rates getting above 3% for any prolonged period of time. We couldn't handle 3.25% on the 10-year for any amount of time with a healthy economy, the lowest unemployment rate in decades, and tax cuts juicing it. Still had a manufacturing recession, negative PMIs, and an inverted yield curve all pre-covid pointing to a recession. 

I doubt we can get to 3.25% with elevated unemployment after the pandemic - at least not sustainably. 

Edited May 25, 2021 by TwoCitiesCapital

[Gregmal]

If rates go to 6 and all else remains equal, probably, yea that causes some hiccups. But thats generally not the case and rates move up as other variables follow. You'd probably have significant wage increases for one which negates much of the 1-4 scenarios. A bigger interest payment is not really that big of a deal. Two, you have so many people still currently on the sidelines, that FOMO and BTFD will come into effect. Next leg of things is decreased regulation/lending requirements, which is the only way to make housing attainable for more people. 

 

[treasurehunt]

16 hours ago, TwoCitiesCapital said:

Probably won't kill housing demand, housing prices on the other hand? A 30-year mortgage with less than 10% down is like 90% interest on the first few years of payments. A jump in rate from 3% to 6% nearly doubles that monthly payment assuming prices don't move. 

Housing prices will probably be affected if the 30 year fixed rate goes from 3% to 6%, but the monthly payment won't come anywhere close to doubling. The monthly P&I actually goes up by just over 42%, as you can verify using a mortgage amortization calculator. When you add in insurance and property tax, the percentage increase in the total annual expense of owning the house is even less - perhaps around 35%. If you look at interest alone, that would be close to double in the early years, but I am not sure why you would look at the interest payment in isolation.

[TwoCitiesCapital]

1 hour ago, treasurehunt said:

Housing prices will probably be affected if the 30 year fixed rate goes from 3% to 6%, but the monthly payment won't come anywhere close to doubling. The monthly P&I actually goes up by just over 42%, as you can verify using a mortgage amortization calculator. When you add in insurance and property tax, the percentage increase in the total annual expense of owning the house is even less - perhaps around 35%. If you look at interest alone, that would be close to double in the early years, but I am not sure why you would look at the interest payment in isolation.

You're correct. Used lazy logic to get there and wasn't thinking about the total amortization over time impacting the payment estimate. The monthly payment (principal & interest) would rise by ~40% as you've said. But for an expense that a typical homebuyer spends 30-50% of their take-home pay on, I don't know if +40% is feasible either even it's better than 100%. 

[muscleman]

Anyone knows when the stimulus checks will stop?

Right now there is a lot of job openings and the employers can't find enough workers because people make more money sitting at their homes. This is not good for the country.

[RichardGibbons]

One of the nice things to come out of this is that it's provided some evidence in the case for a universal basic income (UBI).

Of course, giving people money during a pandemic isn't the same as giving them money during normal times. But even that limitation, it's changed my point of view.

A year ago, I thought we needed to run some experiments on this because the small amount of evidence we had seemed to indicate that would work. Today, I think the evidence is starting to indicate that UBI is unlikely to be a sustainable solution.

Edited May 27, 2021 by RichardGibbons

[Spekulatius]

8 hours ago, RichardGibbons said:

One of the nice things to come out of this is that it's provided some evidence in the case for a universal basic income (UBI).

Of course, giving people money during a pandemic isn't the same as giving them money during normal times. But even that limitation, it's changed my point of view.

A year ago, I thought we needed to run some experiments on this because the small amount of evidence we had seemed to indicate that would work. Today, I think the evidence is starting to indicate that UBI is unlikely to be a sustainable solution.

Why is that? We never tried UBI. We did sent out the first round of stimulus checks for everyone (similar to UBI) but most of the stimulus was sent explicitly to people not working ( enhanced unemployment benefits). This is not UBI. UBI would be sent to everyone, including those that are working, so it would not deter people from working than the current system.

[stahleyp]

1 minute ago, Spekulatius said:

Why is that? We never tried UBI. We did sent out the first round of stimulus checks for everyone (similar to UBI) but most of the stimulus was sent explicitly to people not working ( enhanced unemployment benefits). This is not UBI. UBI would be sent to everyone, including those that are working, so it would not deter people from working than the current system.

Not everyone could claim unemployment insurance and we still have trouble filling jobs. Unless UBI is very small, I would wager that the current unemployed would stay off work...and the people who didn't get unemployment originally may also say "screw it" if given the chance.

 

[RichardGibbons]

6 hours ago, Spekulatius said:

Why is that? We never tried UBI. We did sent out the first round of stimulus checks for everyone (similar to UBI) but most of the stimulus was sent explicitly to people not working ( enhanced unemployment benefits). This is not UBI. UBI would be sent to everyone, including those that are working, so it would not deter people from working than the current system.

Yeah, it wasn't actually UBI, but it was approaching it more than other natural experiments I've seen. I think the two big questions about UBI are:

1. Can we afford it?
2. Will it affect work incentives in really negative ways?

On question 2, the historical evidence (e.g. the Dauphin experiment, the experiment Nixon did) suggested the answer was, "No". The people getting UBI who decided not to work as a result of UBI tended to not work because they were either raising a family or getting advanced education. I perceive those as "good" reasons not to work. Raising a family helps to ensure social cohesion and prosperity for the next generation. Advanced education improves long-term productivity.

With these checks, I think we're observing that many people in lower-paying jobs aren't going back to work. Though the unemployment rate is 6% (i.e. not super low) anecdotally, it seems like employers are struggling to find labor. And, to me, it doesn't look like it's because people are going to school or raising families. It looks like it's because they don't want to work.

That's not to say that UBI is dead in my eyes. Rather, it's that some (sparse) historical evidence made UBI seem like an obvious win if we could afford the cost. This is the first clear evidence I've seen that the changing incentives with UBI might disrupt the labor market. (Which may be an obvious logical conclusion, but to me, it matters that there's now some evidence to support that logical conclusion.)

And maybe those disruptions are fine--the effect might be that the price paid for labor increases until the middle management level and corporate margins fall, which might be a good thing for society, reducing income inequality. But it could also have a bad outcome--many small businesses going bust, a massive spike in unemployment, a reduction in the tax base that would pay for UBI, and even more power consolidated in the biggest companies, exacerbating income inequality.

So, that's why I've changed a bit. The little evidence we had seemed to indicate no negative effects on the labor market, and now the little additional evidence provided by stimulus suggests there could be massive, potentially dangerous effects on the labor market.

Edited May 27, 2021 by RichardGibbons

[muscleman]

I called a local business today who said they are understaffed and I asked about stimulus checks. They said the stimulus checks just stopped so hopefully that helps get people to work. I wonder if that's the case nation wide or is it just WA that stopped the stimulus checks?

Edited May 28, 2021 by muscleman

[Ross812]

On 5/27/2021 at 7:34 AM, stahleyp said:

Not everyone could claim unemployment insurance and we still have trouble filling jobs. Unless UBI is very small, I would wager that the current unemployed would stay off work...and the people who didn't get unemployment originally may also say "screw it" if given the chance.

 

Enhanced unemployment is not UBI. The huge disincentive to working is loss of enhanced unemployment. If you are making $600 a week (15/hr at 40 hrs) in unemployment,  why would you work for $15/hr and lose the easy money?  UBI would pay you regardless.  The person working a $15/hr job would be bringing home $1200 a week in wages + UBI. The incentives are completely different. 

[Ross812]

On 5/24/2021 at 9:55 PM, TwoCitiesCapital said:

Probably won't kill housing demand, housing prices on the other hand? A 30-year mortgage with less than 10% down is like 90% interest on the first few years of payments. A jump in rate from 3% to 6% nearly doubles that monthly payment assuming prices don't move. 

So

1) first time home-buyers get comfortable owning a LOT less house (seems unlikely if we're counting on millennials doing household formation to keep the demand up)

2) first time home buyers get content with paying 50-60% of disposable incomes towards mortgages instead of the 20-30% they typically pay now or

3) transaction volume screeches to a halt and only a handful of buys/sales get made a year from the most desperate buyers/sellers

4) Prices come down some and new build supply goes up some. 

Not sure which of the 4 is more likely, but doesn't really sound super positive for any of them, right? 

I'm also skeptical of rates getting above 3% for any prolonged period of time. We couldn't handle 3.25% on the 10-year for any amount of time with a healthy economy, the lowest unemployment rate in decades, and tax cuts juicing it. Still had a manufacturing recession, negative PMIs, and an inverted yield curve all pre-covid pointing to a recession. 

I doubt we can get to 3.25% with elevated unemployment after the pandemic - at least not sustainably. 

 5) loan periods are extended.  Just like autos (8 yr) and boats (15 yr).

[Castanza]

On 5/27/2021 at 7:11 AM, Spekulatius said:

Why is that? We never tried UBI. We did sent out the first round of stimulus checks for everyone (similar to UBI) but most of the stimulus was sent explicitly to people not working ( enhanced unemployment benefits). This is not UBI. UBI would be sent to everyone, including those that are working, so it would not deter people from working than the current system.

It was sent to people who were recently working and forced out of their job. I think that's close enough and even more insightful since it showed in the matter of a few months how individuals (who were working) can have their mindsets changed by free handouts.

1 hour ago, Ross812 said:

 5) loan periods are extended.  Just like autos (8 yr) and boats (15 yr).

Humans are inherently lazy. If you hand out money people will simply find ways to scale down time spent working. Most people are not driven to work more. Anyone who has worked a minimum wage job can see this for themselves. I have worked a lot of jobs in which I intermingled with "low income" people. There were plenty of opportunities to pick up extra hours (getting close to 40), strive for promotions etc. The reality is most of these people were still looking for excuses to work less. I worked at a lumber yard one summer because they were offering a temp position of $11/hr. Over the course of a few weeks I had the best job in the plant while some other individuals who have been there 20+ years seemed content with their boring job of banding logs together (or some other monotonous task). This was the case everywhere I worked. I guarantee you that if these people got free money, they would be looking to reduce their work hours. 

I will argue that UBI will increase the wealth gap over the long term. The small amount individuals who are productive/task oriented/achieving in society will use the money to their advantage while the majority of individuals will use it to justify more laziness. 90% of people work unfulfilling jobs and do nothing but think of ways out. It gets worse the lower you go on the income scale, and the ability to get out of said job also becomes less likely the lower you go on the income scale. So the best solution for most would be to work less as it's the quickest way to ease the "dread" of working a shit job. It's much easier to buy cigarettes and booze or but a new fishing rod than it is to spend money on education or starting a business. 

 

If you had 10k of free money what would you do with it? Probably invest it or use it productively on your house, debt, etc. 

Now head down to your local trailer park and ask the same question. 

[SharperDingaan]

Couple of diffierent takes ...

For many people, the minimum wage job is just paid slavery. They don't want to be there, anymore than the slave does; but without their 'forced' labour we aren't in business. We got rid of human indenturement a long time ago, but if one looked at a fast-food franchise - one wouldn't know it. UBI just reduces the ability to 'force' labour, and many of the concurrent abuses.  It's only the slave owners (losing their livelihoods) doing the bitching.

Most people just want to be happy in the here and now - wealth is simply measured in other ways, not the size of the bank account. Could be just wanting to spend more time with your kids before they grow up, or more time with your folks before they croak. Could just be 'better treatment' while hanging out with your bums, that you otherwise would get were you working the minimum wage job - a common view amongst the poor. We get what we pay for.

Of course, we will do a lot better if we do work - but minimum wage work isn't going to cut it. There's a reason why there are so many small businesses - for many it is far better to spend your labour flippimg burgers in your own business and not someone elses's; if you need more labour - just import it from the home country! As is the case everywhere, the cream will rise to the top - todays slave owners, just dont appreciate being displaced!

There are also material distrubtion economies, and macro economic benefits. But it's a different discussion.

SD

 

 

  

Edited May 28, 2021 by SharperDingaan

[JRM]

I don't think the "problem" is quite that simple.  I think it's a combination of demographics and monetary policy.  Running the register at McDonald's used to be a job reserved for high school kids looking to make an extra buck, not as a long term career or for the retiree that fell short on their savings in retirement.

People are living longer than they used to and working longer.  The old geezers shaking their fists at the sky saying things like "millennials just don't want to work for nothing!" are the same old geezers who refuse to retire and step aside so a new generation can take over.

The minimum wage in 1964 was $1.25 per hour.  Adjusted for CPI inflation that's somewhere around $10 per hour.  However, the melt value of 5 1964 quarters with 90% silver content is around $25 (5 x 0.18 x $28).  Not to go down the CPI conspiracy theory path, but our fiat system has stripped wealth from the middle and lower classes.

In summary we have shitty demographics in the US on top of a monetary system that punishes savings.  UBI will not fix the problem unless the money comes from taxing the "rich" vs monetizing the debt.

I should add; these problems have been papered over by falling interest rates for the last 40 years.  Where do we go from here?

Edited May 28, 2021 by JRM

[stahleyp]

5 hours ago, Ross812 said:

Enhanced unemployment is not UBI. The huge disincentive to working is loss of enhanced unemployment. If you are making $600 a week (15/hr at 40 hrs) in unemployment,  why would you work for $15/hr and lose the easy money?  UBI would pay you regardless.  The person working a $15/hr job would be bringing home $1200 a week in wages + UBI. The incentives are completely different. 

That's a fair point.

I would still say though that I think (though could be wrong) that there is a decently large amount of people that if they got $600 per week to not work or $1,200 a week to work, they would chose the $600. This also will destroy the value of money in a certain way since people inherently value things far less if it's given to them than if it's earned.

I think it's a recipe for disaster - both for the individual and long term for the nation. 

[Castanza]

33 minutes ago, JRM said:

I don't think the "problem" is quite that simple.  I think it's a combination of demographics and monetary policy.  Running the register at McDonald's used to be a job reserved for high school kids looking to make an extra buck, not as a long term career or for the retiree that fell short on their savings in retirement.

People are living longer than they used to and working longer.  The old geezers shaking their fists at the sky saying things like "millennials just don't want to work for nothing!" are the same old geezers who refuse to retire and step aside so a new generation can take over.

The minimum wage in 1970 was $1.25 per hour.  Adjusted for CPI inflation that's somewhere around $10 per hour.  However, the melt value of 5 1964 quarters with 90% silver content is around $25 (5 x 0.18 x $28).  Not to go down the CPI conspiracy theory path, but our fiat system has stripped wealth from the middle and lower classes.

In summary we have shitty demographics in the US on top of a monetary system that punishes savings.  UBI will not fix the problem unless the money comes from taxing the "rich" vs monetizing the debt.

I should add; these problems have been papered over by falling interest rates for the last 40 years.  Where do we go from here?

The issue is far bigger than the US too. A lot of it comes from globalization and cheaper labor elsewhere. We can raise the minimum wage all we want. That’s a temporary stimulus imo. 

[muscleman]

5 hours ago, Ross812 said:

Enhanced unemployment is not UBI. The huge disincentive to working is loss of enhanced unemployment. If you are making $600 a week (15/hr at 40 hrs) in unemployment,  why would you work for $15/hr and lose the easy money?  UBI would pay you regardless.  The person working a $15/hr job would be bringing home $1200 a week in wages + UBI. The incentives are completely different. 

This is concerning. Do you have any clue when this is gonna end? I just know WA seems to have ended this, and a few other states. But not sure if it is still in most states.

[muscleman]

31 minutes ago, fareastwarriors said:

Maybe I'm too socialist/communist to think like this but damn I think we can afford to pay workers a bit more, have some better benefits, and provide more training, especially in our largest businesses.   Be more like Costco. 

Maybe pay "management" a bit less and a bit less focus on shareholders returns. On average, we, shareholders, are doing more than fine.

 

 

 

 

It depends on what industry you are referring to. I think it is a case by case situation. For example, Germany workers have been known to be highly paid, while being highly productive. If you try that in other parts of EU, it may not work out at all.

But what has this to do with the current catch 22 that Fed is playing? Fed keeps doing QE because unemployment is high, but unemployment is high because people are taking more case at home than going to work.

This thread's intention is to discuss when that may end to predict when QE may end. Please not use this thread to whine about other matters.

[John Hjorth]

I seldom participate in macro topics here on CoBF, so please take this post as it is.

To me, the topic title in this topic is somehow void, because there is an underlying, more basic, issue at hand.

Aswath Damodaran [May 24th 2021]: Musings on Markets : Inflation and Investing: False Alarm or Fair Warning?

[LearningMachine]

52 minutes ago, John Hjorth said:

I seldom participate in macro topics here on CoBF, so please take this post as it is.

To me, the topic title in this topic is somehow void, because there is an underlying, more basic, issue at hand.

Aswath Damodaran [May 24th 2021]: Musings on Markets : Inflation and Investing: False Alarm or Fair Warning?

Thank you @John Hjorth for sharing a measured article with some rational thought.  No surprises.  He alluded to it but I wish he had emphasized a little more how immediately an 8% inflation rate can result in 10% interest rates, and how immediately and drastically a stock price can fall for a company with a lot of debt when its cost of capital goes from 5% to 10% vs. price increases taking 9 years to double at 8% inflation rate. 

As Mr. Buffett said on May 1, "conditions change very, very, very rapidly sometimes in markets."  It may not happen but better to invest with the mindset of requiring reasonable returns in both situations.

Edited May 28, 2021 by LearningMachine

[John Hjorth]

Thank you for sharing, @LearningMachine,

Indeed, the basic question to ask is not what FED will do [subject to : We're in an inflation environment right now], but if we're in an inflationary environment, or not.

Examples :

Timber prices going beserk [covered by investment ideas actively discussed here on CoBF recently], &

Steel prices going beserk [not covered here on CoBF?].

- - - o 0 o - - -

Pretty amazing to look at things right now, shying away & doing nothing, aware of being out of my own circle competence!

- - - o 0 o - - - 

How will all this play out going forward? -Personally, I've no idea [about future inflation, or not].