Every Day Is An ‘Out Of The Frying Pan’ Day

10 thoughts on “Every Day Is An ‘Out Of The Frying Pan’ Day”

1. The second to last paragraph is key. I like it because… who doesn’t like confirmation bias?
   Plus, the central bank is not completely aligned with our interests. Don’t they secretly desire some inflation to repay debt with relatively “cheaper” USD? Won’t they just let inflation go right up to the point (or maybe just passed it) they have to raise interest rates above inflation rates?

2. It certainly does feel like the economy is headed for stagnation and so keeping the easy money flowing is only delaying the inevitable. Why compound the problem by intentionally adding inflation to the mix?

   Also, I am reminded of how you pointed out the lunacy of keeping monetary easing going during a red hot economy just to prop up GDP numbers. That feels prescient now.

3. I’ve been saying for 2+ years, “This feels like the 70’s is happening again.”
   Inflation is necessary to pay old debts, Hamilton figured that one out.
   And like the ’70’s, the growth is in technology, property and maybe TIPS.
   The Fed is bound to repeat what happened during that period of (let’s keep it clean) disarray.

4. We are not in the 70s. Extrapolating now to be like the 70s will turn out to be an error. There are too many large differences in underlying conditions. Supply is disrupted and the Fed or other central bank policy is not going to solve this one way or the other. Time will be the market’s friend here. But we probably have to suffer for another 9-18 months first.

   1. Spot on RIA. A big difference is that private sector unions were a lot more ubiquitous and powerful. That was a good inflationary transmission vector, along with COLAs in wages and benefits. Starting with Reagan, rightwing politicians put a stop to all of that nonsense!

   2. I would add that population growth dynamics was much more favorable in the 70’s as well as lack of consumer indebtedness compared to today…

5. This environment has more flux, uncertainty, and silly chaos than I’ve seen in a while. Case in point: Jamie Dimon said today “the economy is great, the consumer is spending 20% more”. Well, that’s nonsense if it’s false and horrifying if it’s true. Consumers generally can’t just spend 20% more, suddenly, when their savings rate is under 10%, so it’s likely not real… but it if it is somehow true (stimulus, etc) then it means that vast chunks of GDP have already been unsustainably pulled forward and Jamie’s cheerleading just as we dive into the resultant air pocket.

   At any rate, markets and the Fed seem to standing here with one foot on an inflection point and the other on a landmine. For the Fed, consider that it is quite possible for all policy choices to be “erroneous”, meaning, that economic outcomes tomorrow are worse than today no matter what path they pursue. The probability of policy error can be 100% if you’ve picked your historical venue unwisely Bullard this evening identified where he thinks our next step should land (“things are so great we should get that taper done pronto”). Pretty sure that step puts us on one of the landmines. You can tell, because a fast taper is a violation of the Heisenberg Certainty Principle (to wit: “I am certain that central banks can Never normalize again. Like, ever!”). Cheers!

   1. +1

6. Bullard is not a man set in his opinions. I jokeingly call him Mr. Weathervane, though in recent years the humor of it has faded.

   When is he due to be a voting member again?

7. This theme / debate resonates with me. An article yesterday in the Globe & Mail references Morgan Stanley/Andrew Sheets’ take on the 1970’s inflation parallels:

   Many people who lived through the Great Depression remained frugal and fearful about bank solvency for the remainder of their lives. The generation that experienced the inflation of the 1970s were similarly scarred, constantly on the lookout for sharply rising prices and spiking mortgage rates.

   Inflation-related paranoia is common in financial media headlines at the moment as the combination of supply chain tensions and the rising demand from post-pandemic economic recoveries pushes prices higher. Thankfully, Morgan Stanley strategist Andrew Sheets argues convincingly that a 1970s-style upward wage-price spiral is highly unlikely.

   Mr. Sheets pointed out in a note earlier this week that the 1970s was a period of rising wages but also high unemployment, whereas now unemployment rates are falling quickly around the globe. In terms of asset prices, the current market features high stock valuations and interest rates near all-time lows, the reverse of the ‘70s.

   Morgan Stanley sees the market now as more analogous to the 2004-05 period when stagflation – low growth and rising prices – was also a widespread concern. Then, manufacturing activity had started to decline while energy prices pushed inflation data higher. By mid-2005, manufacturing activity was close to registering month over month contractions while the U.S. consumer price index was climbing at an annual rate of 3.5 per cent.

   Equities were volatile in 2005 with price-to-earnings ratios falling generally, but economic growth eventually resumed (at least until the financial crisis) and stagflation fears proved unfounded.

   Although a skeptic regarding stagflation, Mr. Sheets remains bullish on energy prices in the coming years. He cites the work of his colleague, commodity strategist Martijn Rats, who believes that futures prices are understating energy prices, which are likely to stay elevated for the foreseeable future.

   In general, however, Mr. Sheets does not think the 1970s-style stagflation story is anything like a useful guide for investors. “The 1970s are a long way away from our expectations or market pricing,” he writes. “Scenarios of slowing growth and rising inflation clash with our global forecasts of the opposite. Recent moves in inflation expectations and [manufacturing data] don’t fit the story as nicely as one would like.”