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Dylan Leclair: Obviously everyone’s favorite question and no one has the answer is “When Pivot?” Luke Groman was saying in August , which I think is – I have a lot of respect for Luke and his views on things – but I think it’s a little early. This is aggressive; he is very aggressive.
I think the train is going off the tracks very fast here. Sam [Rule] and i’m kidding. We send each other economic charts every day and we have yet to send each other, to see a good looking chart over the past month with all this deteriorating data and public sentiment.
What do you think about the rest of 2022 and maybe 2023?
TXMC: That liquidation of the public debt card. It’s really interesting because it outlines the playbook, which allows inflation to heat up. Suppress yields so they are below inflation and, over time, the debt dissolves.
But the problem is theirs [the Federal Reserve] I came across now, what you alluded to to Dylan, is that inflation has gotten too high. Right? It can’t stay at 8%, 9% yoy and part of the reason it’s so high is because things are out of the Fed’s control at this point: supply chain constraints, China’s zero-COVID policy and Russia invading Ukraine. All of those got exacerbated. What really started in 2020, of course, the fiscal stimulus created a lot of demand, and then after we reopened the economy, that didn’t help either. Inflation has gotten very out of control for them, so I think the “Oh, let’s get it a little hot” playbook, as Janet Yellen has also said in the past. We were open to the idea before he became Secretary of the Treasury.
I think back to when he led the Fed, he said something to the extent of: it’s okay for us too to let inflation exceed the target for a period of time. As long as the economy looks good. You would think maybe they are doing it to some extent here. Maybe they don’t want inflation to suddenly fade to 1% because it is helping to reduce debt, as you said.
If you look at it by quarter, it goes up to 136, but my graph was an annual average. You can see it goes up to around 130 or so, and down to around 124,120 (5% debt / GDP). So it worked up to a point. But because it is so high and because there are some serious structural problems in the economy that could cause the high costs to remain stubborn, it is causing a lot of social unrest, simmering beneath the surface. It’s a real revolt in some countries, but here in the United States it’s still brewing beneath the surface. It is obviously the number one issue for voters in a mid-term election year. You and Sam are like looking at all of this data and it just keeps getting worse and you are absolutely right.
In a way it seems like they’re just trying to keep their wheels on the bus until we get through the election. Because then afterwards they can relax and we can just let the economy deteriorate because they don’t want to have to talk about stimulating the economy or helping to cover the costs for working class citizens who lose their jobs because they caused so much. economic stress even before the elections.
I’m in a really difficult position here. There are many signs that inflation may persist. It may not go down, back to 2% or 2.5% soon. Maybe it stays high at 4%, 5% or 6% or worse.
If so, what does it look like when the Fed has to turn the dove around in that environment? When people are forced to spend a lot more on non-discretionary things than in the past: shelter, food and gas to drive to work. What does it look like for the economy?
If they cannot freely spend and drive expansion, speculate and do all the things that truly produce an exciting bull market for market participants, how do we create? In an environment with stubbornly high costs for things people have to pay for, I don’t know if we have a good answer for that.
There is certainly no recent model for that exact environment and certainly not in the quantitative easing era and every time in the past. When will the Fed pivot? When they pivoted in 2020, which produced that hilarious, absurd and straightforward market for so long, the CPI was at 1.5% and the market dropped 35% in just one day.
So the environment was very different. He was much more panicked. The future was even less certain than it is now and inflation was significantly lower, but this is not where we are now. I think none of the results available to them are particularly interesting at this point.
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