Will Powell be Volcker?

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/articles/feds-powell-set-to-discuss-rate…

**Fed’s Powell Says Ukraine War Creates Risks of Higher Inflation**
**Central bank wants to avoid adding to uncertainty after Ukraine invasion, Fed chairman says**

**by Nick Timiraos, The Wall Street Journal, 3/3/2022**

**..**

**“We’re going to see upward pressure on inflation at least for a while,” because of Russia’s role in global energy and other commodity markets, Federal Reserve Chairman Jerome Powell told the Senate Banking Committee on Thursday. Powell said he would propose a quarter-percentage-point interest-rate increase at the central bank’s meeting in two weeks amid high inflation, strong economic demand and a tight labor market....he laid the groundwork for the possibility of half-point increases this summer, pushing back against the idea that more traditional quarter-point increases represent a speed limit for the Fed.**

**Fed officials have grown anxious because of signs labor markets are overheating, with wage gains well above their pre-pandemic highs, and the risk that consumers and businesses will expect larger price increases in the future, which could foster persistently higher inflation....**

**Sen. Richard Shelby (R., Ala.) pushed Mr. Powell to say whether he would follow the example set by former Fed Chairman Paul Volcker in the 1980s to push down inflation at all costs. “I would hope history will record that the answer to your question is yes,” said Mr. Powell....** [end quote]

Inflation is definitely heating up. The price of chicken at Wal-Mart rose 25% in the past week. Gas is over $4 at some gas stations in my town.

Aside from the sudden drop in the 10 year Treasury yield caused by Russia’s invasion of Ukraine, the yield has been rising since last summer. The 10-Year Breakeven Inflation Rate is 2.71%, showing that the markets expect that 2022’s high inflation will be brought under control.

https://fred.stlouisfed.org/series/DGS10
https://fred.stlouisfed.org/series/DFII10
https://fred.stlouisfed.org/series/T10YIE

I remember well what Volcker had to do to bring entrenched inflation under control. The 10 year Treasury yield was raised to almost 16%. The 1980-82 recession was deep. High unemployment for a long time. Many corporate bankruptcies.

Powell has never had the spine to be Volcker in the past. He turned tail and stopped raising rates as soon as the markets had a hissy fit. This time, he may keep his eye on the ball: the mandate of the Fed is to keep price stability, not protect the markets.

Wendy

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In spite of the surety of interest rate increases, the best rate I can get on a 12 month CD at 5/3 Bank is 0.05%, and that is a special promotional rate. Rates for standard CDs are 0.01%, regardless of amount, regardless of period out to 84 months.

Best rate at PNC is a “promotional” offer, for 13 months: $1,000-$24,999: 0.04%. $25,000+: 0.05%

CDs that matured last year paid 1.75%-2.0%

Steve

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In spite of the surety of interest rate increases, the best rate I can get on a 12 month CD at 5/3 Bank is 0.05%, and that is a special promotional rate.

Our credit union just sent me an email with a 12 month CD at 0.7%. Still not great, but way better than what you are seeing!

IP

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Our credit union just sent me an email with a 12 month CD at 0.7%. Still not great, but way better than what you are seeing!

IP

BCE.to pays a dividend of 5.30%, TRP.to is at 5.13%, Pembina PPL.to is at 5.53%, Enbridge (ENB.to) is 6.11%, BNS.to currently 4.26% … TD.t a paltry 3.62% …

Two banks and a gas pipeline guy are red, the rest all green. To the best of my knowledge our banks pay 0 for cash. Oh, RBC pays 1.5% on a high interest savings account for three months! }};-@

https://www.rbcroyalbank.com/investments/psi/hisa-b.html?ken…

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BCE.to pays a dividend of 5.30%, TRP.to is at 5.13%, Pembina PPL.to is at 5.53%, Enbridge (ENB.to) is 6.11%, BNS.to currently 4.26% … TD.t a paltry 3.62% …

Oh, forgot to mention, all of them are held in TFSA accounts so the dividends are tax free. Oh and I forgot to mention Suncor (SU-t) at 4.28% a relatively new holding.

Any dividends are us mouse.

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Our credit union just sent me an email with a 12 month CD at 0.7%. Still not great, but way better than what you are seeing!

IP

BCE.to pays a dividend of 5.30%, TRP.to is at 5.13%, Pembina PPL.to is at 5.53%, Enbridge (ENB.to) is 6.11%, BNS.to currently 4.26% … TD.t a paltry 3.62% …

Do you hold no cash? We too have excellent dividend paying stocks in our portfolio, including Enbridge, but also a portion in cash. It would be nice to have that portion make a bit of money while waiting to be spent, but I am not taking on market risk with it. We are out of the accumulation phase and taking steps to mitigate risk.

Based on Friday, the market seems to be following your investment strategy. Was shocked to look at my account that holds the dividend paying stocks and rather than the heavy red of the indexes, almost all of my dividend payers were in green…some substantially so. Further rotation away from growth to more stodgy investments? (Though not sure I would call AVGO stodgy.)

IP,
not yet taking SS or pensions

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I remember well what Volcker had to do to bring entrenched inflation under control.

Then you should remember what led up to the “entrenched” inflation. It began appearing as early as 1965, although it wasn’t fully recognized until Nixon was in office. It continued under Ford (remember “Whip Inflation Now” buttons?), and through the first three years of Carter. That is a long time, and it was pervasive and entrenched in union COLA contracts which are less common now both by language and number.

1965 to 1978 was 13 years of accelerating inflation, spurred on by such macroeconomic events as the first OPEC oil embargo, the historical “guns and butter” spending on Vietnam, and the second oil shock produced by the revolution in Iran.

IF you look at the chart, you’ll see that inflation increased year over year for an extended period of time. That is, for the moment at least, not true now. (Unfortunately the only way to find out is to wait a decade which is probably not the best prescription either.)
https://www.usinflationcalculator.com/inflation/historical-i…

In today’s case what we have is a singular shock - both a supply (hampered by factory shutdowns, logistics snafus, etc.) and demand (services abandoned in favor of goods, stimulus monies, time spent in isolation at home) at the same time. If we think most/all those will continue, then it’s a worry. If we think they will dissipate, then we are in the middle of a temporary bout of price adjustment to different market conditions.

That doesn’t mean everything will go back to what it was. Certain things have changed irrevocably, Businesses are raising wages in a (sometimes desperate) effort to attract workers (Yay! Gains are largely at the lower end of the wage scale.) Some people have decided to retire from the work force either mostly or entirely. Some important goods have gone up in price, notably oil (Ukraine and sanctions have something to do with that. Will that last? Don’t know.)

Anyway there are lots of moving parts to this. But the Wall Street Journal is, as often, sounding the alarm for an issue which may not be so important as the 5-alarm fire they think they see. The by-far worse course, at least in the short term, would be to “Volker” and send the economy into deep recession as happened (twice) in 1980 and 1982. A modest rate increase or two, as seems to be in the offing, is a better solution at least until time and the passage of current events like the pandemic and Ukraine appear in the rear view mirror.

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IP: Do you hold no cash? We too have excellent dividend paying stocks in our portfolio, including Enbridge, but also a portion in cash.

I generally have ~ 6-10K in my RBC Day to Day Banking account which is where my four federal pensions arrive monthly. If it goes above that and I have room in my 2 TFSA accounts (I manage wife’s account as well as my own) I move it and either add to existing positions or buy something new. The Day to Day account is also where my bills get paid. I closed my trading account late last year so this is the last year my investments will figure in my income taxes (2021). I do not have a time limit on doing the taxes as they owe me money … which is deliberate on my part. Both of the TFSA accounts have cash from dividends building but not sufficient for adding a full position right now. I did add a full position in Suncor recently.

The rather pathetic part of the story is that we really don’t have a plan for the rather intimidating amount of money in the TFSA accounts as we live comfortably on the pensions and have a very long term debt free policy.

I suspect part of the problem is listening to METaR experts all these years on stashing savings but not having to worry about some of the issues they do? }};-@

I watched a presentation yesterday on all the additional healthcare benefits our feds are throwing at veterans, must be an election in the wind?

Anymouse

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Based on Friday, the market seems to be following your investment strategy. Was shocked to look at my account that holds the dividend paying stocks and rather than the heavy red of the indexes, almost all of my dividend payers were in green…some substantially so.

Actually that makes infinitely good sense to me? Where better to be than in stogie old companies that have the confidence to pay shareholders regularly for owning them? Much of my port is highly regulated Canadian Banks as well as Pipelines that become cash machines once they are built and operating?

Suncor is because of the Russian/Ukraine thing. If Vlad bites a bullet or gets hit by a slapshot while playing hockey shirtless I may rethink it.

Tim

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Was shocked to look at my account that holds the dividend paying stocks and rather than the heavy red of the indexes, almost all of my dividend payers were in green…

Same here. Overall, I was up .48% last week and up 2% the week before, with my geezer, divi heavy, portfolio.

Steve

11 
year  inflation                event
1964     1.3
1965     1.6
1966     2.9
1967     3.1
**1968     4.2     peak year of Vietnam War spending**
1969     5.5
1970     5.7
1971     4.4
1972     3.2
**1973     6.2     OPEC oil embargo**
1974      11
**1975     9.1     Vietnam War ends**
1976     5.8
1977     6.5
**1978     7.6     Iranian Revolution**
1979    11.3
1980    13.5
1981    10.3
1982     6.2
1983     3.2
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