All the spending the US govt is doing will hamstring QT and this author predicts QE will return. Bond holders could be hurt so take note. He thinks the market will be the beneficiary of this. Interesting thoughts here…doc
History is full of examples where the government spent more than it collected in taxes. Before central banks existed, governments often diluted the currency by literally mixing base metals with gold and silver in their coins. The modern equivalent is the central bank buying government debt, adding liquidity (demand) to the economy while producing no additional supply of goods and services.
In every case this happens – thousands of years of financial history – inflation has resulted.
Bond traders will realize this and increase their demand for higher interest rates to compensate for inflation. So interest rates will have to rise even if the Fed switches back to QE.
QE may boost stocks directly. Or rising interest rates may tamp down margin buying, which correlates strongly with the stock market.
Howell might be wrong. Just a thought.
I would not go to the casino with his ideas.
So, stocks may go up–unless they go down? I’m sort of being a smart aleck, but I’m also sincerely trying to be sure I understand what you’re saying.
What Howell is predicting sounds inflationary and I don’t understand how inflation can be good for stocks.
It is not quantified. We do not know in those terms. That was the problem with Friedman making crazy statements that were never quantified. Friedman was wrong every time things were quantified by Samuelson.
Howell is guessing the FED will double its balance sheet. That is a wild guess. I think he is driving in the rearview mirror while the ship turns. He is making wild assumptions to get there. All of his thoughts might be completely unsubstantiated going forward. A complete zero very possibly. The hints(restated as the current realities) of the FED expanding its balance sheet are not that great that we know three years from now this expansion of the balance sheet is ongoing.
There’s no constituency for high interest rates outside of “little old ladies afraid of the stock market”. Keep interest rates low and throttle inflation with other tools like antitrust enforcement, bank capital requirements, and multi-year, Executive Compensation claw back for failed managers.
I guess I should be looking for a nice Sunday dress then
BUT current Congress is more likely to make daily eating of kimchi piled on pilot bread mandatory than vote for such reasonable measures. Hey!, throw in
fully funding IRS audits to at least breakeven returns levels,
ending the multiple hopelessly stupid political bribes such as ethanol subsides,
raising taxes on richer upper third to the horrifically high levels under George Bush
and you will really smell the kimchi!, especially given the 1st Amendment FREE.SPEECH rights the SCOTUS gave to MONEYED non-human entities (the REAL, although relatively stoopid, original AI threat).
The main constituency for higher interest rates are the ignorant/innumerate. I have a colleague that has done pretty well and has a good portfolio including a bunch of cash (apparently >$1M). For years this colleague has been lamenting that the cash has been producing “minimal interest” of about 2%. I tried explaining to them that 2% interest in an environment of 2% inflation results in a slight loss due to taxes. Now that interest rates are higher, they’re getting 5% or so, and a few weeks ago, they were celebrating those high interest rates (literally said “I’m now getting thousands every month instead of hundreds, over seven thousand last month alone!”). I tried to explain again to no avail.
2% nominal - 0.6% taxes - 2% inflation = -0.6% real yield
5% nominal - 1.5% taxes - 4.1% inflation = -0.6% real yield
He’s just as badly off as he was with the yields from two years ago! Except now the nominal numbers are much larger and may even push him into a higher tax bracket.
What would your formula be for a Treasury for the next 12 months?
5.428% nominal - 1.63% tax - 3.8% (est inflation) = 0%
(The last 52-week treasury bill was auctioned at 5.428%)
Thanks for the explanations!
And please sir may I have another:
How did you arrive at 3.8% inflation for the next 12 months?
Just a guess. Assuming they expect inflation to get back to 2% by mid-2025, then something like 3.8% (mid-23) to 2.9% (mid-24) to 2% (mid-25). Maybe the period 7/23 to 7/24 will be closer to 2.9%?
Well I generally do not get into it but bonds are not the place to be. I see the threads here and think oh well.
The higher rates are to head off inflation making your equity investments worth more. Worth more ten years and twenty years from now not next week.
If you see yields as not worth it this coming week why would you want lower yields? That is more inflation against your equity portfolio.
The reverse of your math is low yields make for higher equity prices? Yeah if inflation stays low. It wont stay low if yields fall. Unless we tax the corporations and top income bracket more.
The difference then is your principle shrinks. Meanwhile with higher yields your principle reflects how the corporation does but you do not lose principle in the deal.
We are talking marginal matters. Over the course of ten years we are talking the affordability of your retirement. That is the problem with lower yields.