The US economy is a story of acute divergences, making it increasingly hard for the Fed to deliver on its mandate of 2% inflation rate. It's going to be a bumpy ride.
What a piece of excellent research, Amrita! Wow! There is so much to unpack.
1) While gold has outperformed major fiat currencies, let's not forget that gold has been a lousy investment, a lousy inflation protector, a lousy crash protector, and a lousy diversifier for both stocks and bonds over the past 40 years. The only time it has been a great investment is during periods of expected economic slowdown with the anticipation of a soft landing, which seems to be happening now. During such times, gold has delivered double-digit returns almost every time.
2) I’m surprised I don’t see health insurance among the inflation drivers, unless the BLS combined it with medical expenses. Health insurance premiums have been growing at around 4%, and with my luck, my personal insurance premiums have been growing in the 10-12% range.
3) I’m also surprised that education prices grew at only 2.4%. I suspect the BLS may have combined subsidized and non-subsidized education, which is incorrect because I believe only the top-level non-subsidized prices should be reported, or at least reported separately.
Thanks Sergei, glad you enjoyed the post. To some of the points you raised,
1) The flight to gold only occurs when the broader market starts losing confidence in the Fed's projections of how it will bring down inflation rate to its target. The last time we saw it properly take place was in the 1970's and '80's, however to your point, it has underperformed the indices over the last 40 years because we haven't had much of an issue with inflation concerns. Having said that, it still is a store of value and it protects your purchasing power over the long term.
2) I believe you are right, it is clubbed under Medical Care.
3) Fully agree with you on this, the BLS numbers in general need to be taken with a grain of salt.
I don't get why the "national deficit" matters. It never seems to matter when bailing out banks or giving the pentagon 1T a year. It only matters when it comes to paying for pensions or health care when we "can't afford" it.
I'd say what matters in not so much the "debt" as the deficit. Compared to raising revenues, deficits that cause higher interest rates are a drag on growth. [If anyone has ideas for reducing expenditures by 7% of GDP, let's hear them!]
Fully agree with the sentiment. The truth is the widening of the deficit is not good under any circumstances, unless of course there is a targeted plan behind how to best use it to drive productive outcomes.
I could make a fiscal rule it would be deficits should not exceed the value of expenditures with NPV > 0 ("investment"). Everything else, with NPV =< 0 ("
consumption, intermediate inputs") should be financed with taxes, ideally a combination of progressive consumption taxes, taxes on net emissions of CO2, and VAT.
Fascinating breakdown of the complexities facing the Fed right now! Your clear analysis really brings the various economic signals and policy options into perspective. Curious to see how this unfolds—what do you think will be the most likely next move by the Fed in the coming months?
Thanks Reyza, glad you enjoyed the post. Unless we see any major supply-side inflationary shocks, I think the Fed will actually do nothing at all and let the bond market do its work, like you can see with the 10Y Treasury yield steepening, which tightens financial conditions.
I would imagine that the current administrations policies of shoveling cash into war bonfires, student loan and illegal alien entitlements, and inane green energy mandates have blunted the Fed's efforts to control inflation?
I do not. If the Fed wants to hit an inflation target it will hold or raise interest rates as necessary. My guess is that something less than 5% EFFR will be enough.
No, it hasn't. The best defense money we have ever spent is on Ukraine. The "green energy" mandates have given the US an energy surplus for the first time since WWII. Hardly innane. By the way, remember when Trump sent troops to help out Puting and Assad in Syria? That was insane. All of our enemies fighting each other and he enters the fray.
Funny. The last section is the important one. There are two problems. 1) McDonald's raised its margins 50% over the last 5 years. That has nothing to do with costs or the Fed or the deficit. Wages make up about 12% of McD's costs. 2) Taxes are too low on corportations and the rich. The Federal government needs to spend more on everything but defense and profitable companies need to pay for it. Interest rates neither pay down the deficit nor lower the price of a hamburger. The Fed is like a kid in his high chair felling in control, spinning the little steering wheel left and right as nothing happens. Instead of thinking, "I had better try breaking up monopolies, higher taxes or price controls", he spins harder. Modern Economists don't think.
Eeny, meeny, miny, mow... 🤔 it will be interesting to see where they go with this! Thank you I am read it for another very well curated financial report! I always enjoy your writing, you take boring and make it interesting! Thank you! 🤗♥️
Thanks Charlotte, it is challenging to turn these dry (but important) topics into something entertaining and easy-to-comprehend, and when I am unable to induce a little humor into all of this, I get bored while writing. Thanks for your kind words, means a lot coming from you.
Fully agree with you. Lowering rates at a time when inflation is still coming hotter will wreak havoc in the bond market, destabilizing inflation expectations, not to mention premiums for borrowing will spike. Having said, should we see any weakness in the UST market, as Reverse Repo facility is almost emptied out, the Fed will have no choice, but to lower rates at that time, inflation or no inflation.
Fantastic post Amrita. The recent CPI has come as a shocker and the Feds are dealing with a tense situation here. Add to that geopolitical tensions. If the fiscal deficit widens, the government will have no choice but to print more money. Inflation and interest rates will go for a toss then.
Every move the Fed makes now can have a butterfly effect. Let's hope it turns out good.
Thanks Sanuj. You are spot on with your analysis, the dynamics playing out in the macroeconomic environment indeed feel like a rollercoaster. It is ironical though that the Fed who calls themselves "data dependent" technically has no other choice but to lower rates in order to fund ongoing government deficit, else the debt will further balloon and the Treasury market will some kind of a failure. In the interim period, if the 10Y US Treasury can do some of the tightening work for the Fed, that will help, because I don't think Powell is going to put his credibility on the line and raise the inflation target.
In the short term, I am watching how the strengthening dollar will down on growth on certain countries globally.
Interestingly, the US stock market is solid. It's grown on quite a few companies beyond NVidia. I'm holding my stocks and ETFs, all US equities. However, I can see now that slowly building a position in precious metals was a good decision in 2023-24. That graph showing dollar vs. gold says it all.
Hi Denis, I have been bullish on gold since Oct/Nov of last year. When you untangle the macro cycle, it makes perfect sense to be bullish both gold and silver. I also think energy stocks are extremely well positioned, though a lot of them had quite a run over the last month or so.
Amrita or anyone...when they say "infinite horizon" how then does the $175T amount get calculated regarding the total long terrm debt when accouting for all payouts in SS, MEDICARE, ETC....
They must pick some date in the future right? 2100?
US life expectancy is decreasing. Especially among Trump voters White, no college, males). This is not a joke. If this keeps up, SS will be balanced. Very, very sad.
Thank you. This piece made sense of an area I have little expertise in and a steadying counterfactual to the increasingly hysterical and contradictory financial analyses in legacy media.
Thank you so much Monnina for your kind words, I am glad I was able to demystify some part of this entangled web of financial monstrosity that we live in.
Powell surely knows that 2% is mythical, but he knows he doesn't have to be the one admitting this. He'll leave that to a future Chair. He wants to be remembered as the guy who at least tried to hold the line.
With long-term TIP break even only around 2.5%, "the market" is not voicing a big feat either. Once that stays above 3% for a year and bounces toward 4% rather than toward 2%, the next Chair may acknowledge we'll be higher forever
Fully aligned with you, Powell is not going to risk putting his credibility on the line here. I think, in the interim period, we should once again see a slowdown in inflation, given how far the yield curve has bear steepened. But, long term, I strongly believe we have entered a period where getting inflation down to 2% would mean raising rates to insane levels and breaking the economy hard. Is it necessary, given that 2% is an arbitrary number? Not in my opinion, but it needs to be slowly and carefully communicated over a period of time. Unless, of course, we see a major deflationary impact from AI taking over jobs en masse.
What a piece of excellent research, Amrita! Wow! There is so much to unpack.
1) While gold has outperformed major fiat currencies, let's not forget that gold has been a lousy investment, a lousy inflation protector, a lousy crash protector, and a lousy diversifier for both stocks and bonds over the past 40 years. The only time it has been a great investment is during periods of expected economic slowdown with the anticipation of a soft landing, which seems to be happening now. During such times, gold has delivered double-digit returns almost every time.
2) I’m surprised I don’t see health insurance among the inflation drivers, unless the BLS combined it with medical expenses. Health insurance premiums have been growing at around 4%, and with my luck, my personal insurance premiums have been growing in the 10-12% range.
3) I’m also surprised that education prices grew at only 2.4%. I suspect the BLS may have combined subsidized and non-subsidized education, which is incorrect because I believe only the top-level non-subsidized prices should be reported, or at least reported separately.
Thanks Sergei, glad you enjoyed the post. To some of the points you raised,
1) The flight to gold only occurs when the broader market starts losing confidence in the Fed's projections of how it will bring down inflation rate to its target. The last time we saw it properly take place was in the 1970's and '80's, however to your point, it has underperformed the indices over the last 40 years because we haven't had much of an issue with inflation concerns. Having said that, it still is a store of value and it protects your purchasing power over the long term.
2) I believe you are right, it is clubbed under Medical Care.
3) Fully agree with you on this, the BLS numbers in general need to be taken with a grain of salt.
Gold does not protect your PP as well as a TIPS.
I don't get why the "national deficit" matters. It never seems to matter when bailing out banks or giving the pentagon 1T a year. It only matters when it comes to paying for pensions or health care when we "can't afford" it.
I'd say what matters in not so much the "debt" as the deficit. Compared to raising revenues, deficits that cause higher interest rates are a drag on growth. [If anyone has ideas for reducing expenditures by 7% of GDP, let's hear them!]
Fully agree with the sentiment. The truth is the widening of the deficit is not good under any circumstances, unless of course there is a targeted plan behind how to best use it to drive productive outcomes.
I could make a fiscal rule it would be deficits should not exceed the value of expenditures with NPV > 0 ("investment"). Everything else, with NPV =< 0 ("
consumption, intermediate inputs") should be financed with taxes, ideally a combination of progressive consumption taxes, taxes on net emissions of CO2, and VAT.
Fascinating breakdown of the complexities facing the Fed right now! Your clear analysis really brings the various economic signals and policy options into perspective. Curious to see how this unfolds—what do you think will be the most likely next move by the Fed in the coming months?
Thanks Reyza, glad you enjoyed the post. Unless we see any major supply-side inflationary shocks, I think the Fed will actually do nothing at all and let the bond market do its work, like you can see with the 10Y Treasury yield steepening, which tightens financial conditions.
I would imagine that the current administrations policies of shoveling cash into war bonfires, student loan and illegal alien entitlements, and inane green energy mandates have blunted the Fed's efforts to control inflation?
Or, as they say, the money printer machine goes Brrrrr... Fully agree with you.
I do not. If the Fed wants to hit an inflation target it will hold or raise interest rates as necessary. My guess is that something less than 5% EFFR will be enough.
No, it hasn't. The best defense money we have ever spent is on Ukraine. The "green energy" mandates have given the US an energy surplus for the first time since WWII. Hardly innane. By the way, remember when Trump sent troops to help out Puting and Assad in Syria? That was insane. All of our enemies fighting each other and he enters the fray.
Curious that higher taxes on investment income and higher top marginal tax rates are never mentioned.
Funny. The last section is the important one. There are two problems. 1) McDonald's raised its margins 50% over the last 5 years. That has nothing to do with costs or the Fed or the deficit. Wages make up about 12% of McD's costs. 2) Taxes are too low on corportations and the rich. The Federal government needs to spend more on everything but defense and profitable companies need to pay for it. Interest rates neither pay down the deficit nor lower the price of a hamburger. The Fed is like a kid in his high chair felling in control, spinning the little steering wheel left and right as nothing happens. Instead of thinking, "I had better try breaking up monopolies, higher taxes or price controls", he spins harder. Modern Economists don't think.
Does anybody really believe the "official" inflation rate?
The Dollar Tree raised the price of their items from $1.00 to $1.25. Also, some of their products were reduced in size.
John Williams of Shadowstats.com calculates inflation based on older methods. https://www.shadowstats.com/alternate_data/inflation-charts
Well written, thoughtful piece. Thanks!
Thanks, glad you enjoyed the post.
Eeny, meeny, miny, mow... 🤔 it will be interesting to see where they go with this! Thank you I am read it for another very well curated financial report! I always enjoy your writing, you take boring and make it interesting! Thank you! 🤗♥️
Thanks Charlotte, it is challenging to turn these dry (but important) topics into something entertaining and easy-to-comprehend, and when I am unable to induce a little humor into all of this, I get bored while writing. Thanks for your kind words, means a lot coming from you.
Well, you are an artist and craftsman when you write these pieces! Thank you! 💞
🙏🏼🙏🏼🙏🏼
As much as us individuals want the rates to be lowered, with markets hitting all time highs, I don't think they should be lowered.
Fully agree with you. Lowering rates at a time when inflation is still coming hotter will wreak havoc in the bond market, destabilizing inflation expectations, not to mention premiums for borrowing will spike. Having said, should we see any weakness in the UST market, as Reverse Repo facility is almost emptied out, the Fed will have no choice, but to lower rates at that time, inflation or no inflation.
Fantastic post Amrita. The recent CPI has come as a shocker and the Feds are dealing with a tense situation here. Add to that geopolitical tensions. If the fiscal deficit widens, the government will have no choice but to print more money. Inflation and interest rates will go for a toss then.
Every move the Fed makes now can have a butterfly effect. Let's hope it turns out good.
Thanks Sanuj. You are spot on with your analysis, the dynamics playing out in the macroeconomic environment indeed feel like a rollercoaster. It is ironical though that the Fed who calls themselves "data dependent" technically has no other choice but to lower rates in order to fund ongoing government deficit, else the debt will further balloon and the Treasury market will some kind of a failure. In the interim period, if the 10Y US Treasury can do some of the tightening work for the Fed, that will help, because I don't think Powell is going to put his credibility on the line and raise the inflation target.
In the short term, I am watching how the strengthening dollar will down on growth on certain countries globally.
Excellent article. Please continue to take care of yourself. Your insight and analysis is valuable.
Thank you Bryan, glad you enjoyed the post.
Interestingly, the US stock market is solid. It's grown on quite a few companies beyond NVidia. I'm holding my stocks and ETFs, all US equities. However, I can see now that slowly building a position in precious metals was a good decision in 2023-24. That graph showing dollar vs. gold says it all.
Hi Denis, I have been bullish on gold since Oct/Nov of last year. When you untangle the macro cycle, it makes perfect sense to be bullish both gold and silver. I also think energy stocks are extremely well positioned, though a lot of them had quite a run over the last month or so.
Yep. War in inflationary and given how much money has been produced since 2008, it's about time gold and other precious metals went up.
Amrita or anyone...when they say "infinite horizon" how then does the $175T amount get calculated regarding the total long terrm debt when accouting for all payouts in SS, MEDICARE, ETC....
They must pick some date in the future right? 2100?
Maybe adding life expectancy years to 2024?
Great question, I actually don't know the answer to this one. This is the original document: https://fiscal.treasury.gov/files/reports-statements/financial-report/2023/02-15-2024-FR-(Final).pdf
I probably need to dig through it.
Thanks! Looks like they use a 75 year window...75 is mentioned several times in there.
US life expectancy is decreasing. Especially among Trump voters White, no college, males). This is not a joke. If this keeps up, SS will be balanced. Very, very sad.
Agree it's decreasing...but not enough to cover that. Thats insane.
Thank you. This piece made sense of an area I have little expertise in and a steadying counterfactual to the increasingly hysterical and contradictory financial analyses in legacy media.
Thank you so much Monnina for your kind words, I am glad I was able to demystify some part of this entangled web of financial monstrosity that we live in.
Powell surely knows that 2% is mythical, but he knows he doesn't have to be the one admitting this. He'll leave that to a future Chair. He wants to be remembered as the guy who at least tried to hold the line.
With long-term TIP break even only around 2.5%, "the market" is not voicing a big feat either. Once that stays above 3% for a year and bounces toward 4% rather than toward 2%, the next Chair may acknowledge we'll be higher forever
Fully aligned with you, Powell is not going to risk putting his credibility on the line here. I think, in the interim period, we should once again see a slowdown in inflation, given how far the yield curve has bear steepened. But, long term, I strongly believe we have entered a period where getting inflation down to 2% would mean raising rates to insane levels and breaking the economy hard. Is it necessary, given that 2% is an arbitrary number? Not in my opinion, but it needs to be slowly and carefully communicated over a period of time. Unless, of course, we see a major deflationary impact from AI taking over jobs en masse.