Inflation, Interest Rates, and the Market

I am not sure if these four notes are outside the paywall. I think so. Epsilon THeory are taking a victory lap or two with their early comments WRT inflation. Bottom line is they have, and have had, great distain for the Federal Reserve Board. Some interesting physics in there somewhere worth the read. But bottom line of their opinion is that the interest rate hikes are not going to halt the inflation and that the feces is already in the fan.…………

This last note shows the utter distain with which these site holds the Fed voting members.

I’m not so sure. I think interest rates of 3.75 to 4% are somewhat baked in, with these wild swings playing off CPI and Fed forward guidance, etc. Maybe the question is whether or not 4% will do the job. Whether there is political will to increase the rate and inflict pain on asset prices. I am confused about the effect of raising rates in the context of the massive creation of money–I guess M1 and M2 and maybe Mn. If it is done via taking on debt, then the escape hatch is debasing the currency, i.e., inflation. Pay it off with cheap dollars. On the other hand, doesn’t raising interest rates actually strengthen the dollar? Particularly with Europe under such stress. Ruble is strong. China probably cannot afford a strong currency. ??? But the theme is that all the stimulus pulled forward future growth and future profits.

So the painful way out is to increase productivity, but that requires a market to absorb the increased production, or else the result is fewer jobs/workers which is not good for a consumer-led economy.

DOes this mean anything for us? Maybe the SaaS businesses maintain growth at historically very good rate, but not hyper, and the stock prices can tread water or show some growth while the broad market stagnates or goes lower. Where to hide. That says that we will