John Mauldin on inflation

[WendyBG]

I read John Mauldin’s weekly essay, “Thoughts from the Frontline,” because it’s always interesting and sometimes brilliant.

“Fingers of Instability,” written in 2006, was brilliantly prescient and should be re-read today along with later essays based on the same concept.

https://www.mauldineconomics.com/frontlinethoughts/fingers-o…
https://www.mauldineconomics.com/frontlinethoughts/amp/the-f…
https://www.mauldineconomics.com/frontlinethoughts/another-f…

Today’s “Thought from the Frontline” was unusually valuable.
https://www.mauldineconomics.com/frontlinethoughts/gradually…

Mauldin discusses inflation in the context of the change in the way the Bureau of Labor Statistics calculates housing costs. The 1983 introduction of “Owner’s Equivalent Rent” instead of actual home prices or mortgage payments makes inflation before and after 1983 not directly comparable.

A group including Larry Summers has recalculated CPI so they are comparable.
https://www.nber.org/papers/w30116

Mauldin shows charts from this paper. Maudin also quotes Fed Chair Arthur Burns (who presided over high inflation) in September 1979. He had left the Fed 18 months earlier.

**“American policymakers tend to see merit in a gradualist approach because it promises a return to general price stability—perhaps with a delay of five or more years but without requiring significant sacrifices on the part of workers or their employers. But the very caution that leads politically to a policy of gradualism may well lead also to its premature suspension or abandonment in actual practice.**

**“Economic life is subject to all sorts of surprises and disturbances — business recessions, labor unrest, foreign troubles, monopolistic shocks, elections, and governmental upsets. One or another such development, especially a business recession, could readily overwhelm and topple a gradualist timetable for curbing inflation. That has happened in the past and it may happen again.”** [end quote]

Maudin shows how Paul Volcker raised the fed funds rate extremely rapidly. The Volcker Fed had multiple hikes of 100 bps or more, causing the 1980 recession. Then they took fed funds 1,000 points higher in the second half of 1980. This make Jerome Powell’s 75 bps increase look puny and gradual by comparison.

Yesterday, I posted a Fed model showing a gradual increase of fed funds rate going into 2023, with a reduction of inflation and a very mild recession. The Fed appears to believe that it can pull this off.

Is the Fed right? Or are they fooling themselves with the same optimism that led them to believe that inflation was “transitory”?

As consumers and investors, we have a deep interest in this critical time of trend change. METARs who work may lose their jobs in a recession (along with many others). All of us will face higher prices if inflation remains high. (Which I think it will.) All of us will face loss of asset values as the Fed raises the fed funds and longer-duration rates.

Fed Chairman Jerome Powell caved in 2018 when the Fed raised rates and the markets had a hissy fit. Will he cave in 2022-2023 when the asset markets tank and the expected recession turns out to be unexpectedly deep?

If he caves, we will have stagflation. If he doesn’t cave, we may get a deep recession.

Wendy

[Leap1]

Wendy,

In the thick of it high inflation looks never ending.

If any of us did what EU and US officials are doing to bring it down, it would be called market manipulation.

First the EU wont insure tankers with Russian oil

Then the Russians undercut OPEC, and are now stuck doing that again and again

Now the EU will insure Russian oil so it will flow?

It goes beyond that. The major government executive branches are making all of these seemingly small decisions that go to the heart of screwing down free enterprise walking in and wildly profiteering.

Yes the oil companies are wildly profiteering for a few months in here. I have not looked but if XOM is up…I would definitely not want to be holding it at this moment.

[texirish]

I read John Mauldin’s weekly essay, “Thoughts from the Frontline,” because it’s always interesting and sometimes brilliant.

Today’s “Thought from the Frontline” was unusually valuable.

Wendy, a special thanks for bringing this to the attention of the group. Well done.

Two points from this, and other, studies are of real concern:

1. Official core CPI inflation peaked at 13.6 percent in June 1980, whereas we estimate that core inflation was 9.1 percent in that same month when adjusting for the treatment of shelter inflation.

2. Interest rates may (will?) have to be at or near the rate of inflation to break the cycle.

I doubt many people are really comprehending that we may need interest rates as high as 9% unless the drivers of current inflation - supply shortages, oil prices, housing prices, China/India demand, et.al. - otherwise reverse themselves.

Since all this is still in front of us, any talk of being “near the bottom” on the stock market now seems way early. That seems a question better asked a year from now than today.

You bring this to our attention. I hope folks are listening.

[bjurasz]

Fed Chairman Jerome Powell caved in 2018 when the Fed raised rates and the markets had a hissy fit. Will he cave in 2022-2023 when the asset markets tank and the expected recession turns out to be unexpectedly deep?

That’s not why Powell caved in 2018, but the real reason why he caved then is not an allowed topic here. But relevant is the fact that reason-to-cave does not exist now. This is enough to make me believe that Powell won’t cave this time around.

Buckle up.