The ‘Radical’ Economic Theory Taking Markets By Storm
Earlier this week, a reader asked for my opinion on a "heretical" notion: The idea that high rates may be facilitating, rather than impeding, economic activity in the US.
The impetus for the reader inquiry was an energetic article which anchored the April 16 edition of Bloomberg's "Evening Briefing," one of countless mailers you can sign up for if you want to treat your inbox like a force-fed foie gras duck.
The piece, called "What If Fed Rate Hikes Are Actually Sparking US Economic Boom?" is
Adding to the point, these rate hikes were telegraphed to such an extent, in order to lessen their impact due to fear of financial cataclysm, that anybody who dared to listen adjusted prior to the move.
Thanks for the funny re-telling of “I told you so” =p
Presumably Powell and the Federal Reserve voting and non-voting members are aware of this.
Which leads me to ask- what do you (H) think is their rationale for stay
…for staying at this level of rates for an even longer period of time?
Perhaps their models have proven to be incapable of accounting for the impact of the interest rate changes thanks to the sheer speed and magnitude of the interest rate changes. Their models certainly did not properly did not properly handle the impact of higher rates on the housing market so that idea is not so far-fetched.
Ah, the perils of relying on models to explain something as overwhelmingly complex as global weather or the US economy.
If the possible pro-inflationary effect of higher rates has been discussed by FOMC, would we know from the minutes? Or is that naive?
So conversely if the Fed reduces rates then corporates and households would lose the incremental “cushion” from the interest income. But the reduction in rates would increase risky behavior due lower borrowing cost. Strange place to be in. It’s almost goldilocks-ish depending on your vantage point?
So money market interest rate at r*?
Bravo, Maestro! Thank you.
This is what you call a “mic drop” post. Another reminder I think worth repeating, 5% rates are not “high”. 5% was a low rate until the bankers broke the global economy and then a bunch of idiots let a spoiled self-obsessed idiot man child run the most powerful country on the planet during the worst pandemic in a 100 years.
Warren Moslter convertd me 25 years ago and I became a Stephanie Kelton accollyte. BUT the economics and the politics don’t match now. There is one vote for each individual – moe or most less – but about 70-80% of all individuals have a negative cash woth. If your cash balance is below zero and – even worse – if you are a renter you are screwed. H, you have showed a chart of the benefits of the COVID assistance in 2020 and through much 0f 2021 and pointed out how this money boosted consumption. The latest of thse that I remember shows that more than 80% had spent everything and were worse off than 2019 – more in debt. With credit card rates up they are hurting. For those voters – and it is more than 50% of all voters, things are worse now. Over 40% of outstanding cards are in a debit position at 22% average rate. You can count them as disbelievers and angry at Biden. The bottom 70% of the wealth ladder used to be Democrats. No longer. Powell has screwed the lesser-off majority.
Your post indeed paints a bleak picture. But the conclusion you draw in your last sentence isn’t correct. To the extent that it is correct, I’ll assume the outcome was inadvertant as opposed to the lesser-off majority being deliberately screwed for decades by Congress and corporations in their quest for campaign contributions and profits, respectively
It seems the 800lb gorilla in the room to solve this problem is taxation to suck up all the extra dollars at the top. Maybe the power of taxation should be given to the Fed/Treasury. Can you imaging if the Fed meeting were something like, “Next Quarter’s tax rates will be…” Obviously Congress is not doing their job. Federalism is the root of the problem. Low population states should not have same power as high population states. Just like states redraw voting districts, we should redraw the state lines in this country for a fairer more representative system. Wishful thinking…
I’m not sure there’s a worse democratic institution in a republic than the US Senate.
And I agree with you 100%. This country has outgrown the concept of “states” that were very important in helping to unify the country at its birth and for a century plus thereafter.
I agree the smartest thing to do here is raise taxes on the top 10%. A service tax on lawyers and accountants above 10k would help too. Meanwhile, Trump is promising to re-subsidize yachts and such…
Yes- this is the elephant in the living room…
As comedian Foster Brooks often said in his stuporous guise, “I’ll buy that for a dollar.” Actually, there is not really much to see here. The trick is not low cost borrowing, just a Weighted Average Cost of Capital below the return of any available asset. For decades financial theory has taught us that to invest profitably one just needs to buy any asset for which the forecast cash receipts have a present value return (IRR) above the investor’s WACC. Anywhere on the capital market line will do. Starting in the early 1980s many treasury bonds were available at a discount owing to high market rates. The required margin rules on such investments were 5% down. Margin lending could be had at a broker for about 200-250 bp above the T-bond coupon rates so investing 40% of the price of such bonds would cover one’s borrowing costs, leave a couple hundred bps of profit and offer huge prospects for capital gains in a year or two. I’m living off the results of repeated applications that strategy even now. The level of leverage determined the dollar outcome, just as it does with any leveraged buy. CEFs operate on this principle …. My doctoral mentor wrote books about leverage. Wonderful stuff.
Yes, leverage is wonderful…..until it isn’t.
Higher rates mean that I can finally have my house repainted. And a developing sinkhole managed. I don’t think I’m someone who “counts”, I’m someone who is not working due to age-related issues.
Also, I really appreciate the flux capacitor reference.
I see a steady stream of new corporate issues at 15 years, 6% YTM, and a few years call protection. More terming out, and no downside (for the issuer) with the call.