Since my time is too scarce to watch CNBC, and because CNBC are a bunch of paid robots pushing whatever BS the general public will believe, I depend on Youtubers to help me forecast.
Mark Moss recently released a video explaining his opinion on whether the central banks would be able to stop inflation and he raised some really interesting points. I\’d like to discuss those points here:
- The FED / central banks (same thing) are attacking the Demand side of the problem but they really need to be attacking the Supply side of the problem. This means that instead of crushing demand they should be working to increase supply to keep up with demand, which will bring prices down. If supply is increased, how fast will prices drop? It depends how long suppliers are willing to sit on slow inventory before moving it at a lower price – this could take months. If demand is decreased, how fast will prices drop? The answer is the same – it depends how long suppliers are willing to sit on slow inventory before moving it at a lower price – this could take months. OK so let\’s ask a different question – why are prices high in the first place? Prices might just be high because they have to be – suppliers a struggling with a retiring labor force, pandemic-induced lethargy, increasing energy prices.
- The mainstream media is lying about the state of households right now. He says that the MSM is trying to push the narrative that households are strong but the data indicates that their spending is on an uptrend while their savings are on a downtrend. This seems like a moot point but perhaps one takeaway here is that this explains the increase in demand for goods – consumers are still spending. Perhaps a lot of them refinanced their home when they could which gifted them tens of thousands of dollars to blow (we did just see house prices double in the last 5 years and then a bunch of people refinance their homes while interest rates were practically at the lowest rate ever, in 2020 and 2021). It\’s possible that cooling demand will be an absolute necessity to bring prices down. The other takeaway is that the MSM is trying to suggest that people can withstand a hike in interest rates, which is a lie. Families will be hurt by the increase in interest payments, and they will also be hurt when they lose their jobs. But, runaway inflation is scary enough to scare any educated person into avoiding it, and so that is the boat we are all in.
Steve Saretsky recently put out a video where he argues that the increases in interest rates are actually equal in severity to those seen in the late 80\’s because of the debt-to-GDP ratio. If the debt-to-GDP ratio is similar to the velocity of money, then I can see how this makes sense. In the late 80\’s and at this current time, many people (but probably less than half of all adults) are forced to pay higher interest rates because they have a variable mortgage or because they just had to renew their mortgage at this unfortunate time. Those people are having to spend more in interest payments, similar to the late 80\’s \”Volker Days\” which brought a lot of pain. Steve argues that it is not the interest rates alone that tell the story but the percentage increase in interest payments, in conjunction with the amount of debt that people and businesses are carrying. The increase in interest rates have a much more pronounced effect on the interest we pay now because we are carrying so much more debt than we were in the 80\’s. This is really good to know because it suggests that we will not see interest rates as high as we did in the 80\’s.
So, it makes sense that increasing interest rates should have a downward pressure on inflation because it will discourage spending, but I don\’t think it will affect those who refinanced their homes in 2020 or 2021 – all those people already cashed out at all time highs and they have 3-4 years before they have to renew their mortgage again. The increase in interest rates is raising mortgage payments, blocking new home buyers from buying homes, but also depreciating the value of the homes they are trying to purchase. They are making houses unaffordable and forcing new home buyers to pay a premium for homes, and they have to pay that premium to the banks. But none of this explains whether the fed is going to stop inflation.
Inflation is a complex problem and can be resolved by pulling many different levers. The interest rate lever they are pulling will be messy and so as soon as something breaks (like they forecasted)(such as unemployment or another financial crisis) they will step in to pull another lever but they haven\’t indicated what lever that is going to be, but there\’s a good chance that it\’s going to be a bailout for banks, just like 2008. They might also bail out individuals and businesses to some extent but after pumping so much money into the economy during the pandemic how are they going to explain not bailing out all the unemployed people?
Peter Schiff believes that the Fed will not be able to contain inflation because they will be forced with these decisions and have no choice but to bail everyone out and inflate even more.
This is a really interesting problem. Times are good when borrowing is cheap, and times are tough when borrowing is expensive, but nobody wants tough times so it is a political problem. I sat down with an economist years ago who was advising a family member on how to invest in mutual funds and I was surprised when he said that the stock market was more or less dependent on the decisions that would be made in the years following by the Federal Reserve. I found it difficult to believe him at the time, but after watching the government and the fed bail out everybody during 2020 and 2021, I believe now that he was absolutely right. Having a distaste for authority and power structures, I don\’t want to believe they have that much control, but there is little evidence to suggest otherwise. And right now, it is not just the stock market they are controlling, but the housing market, the debt market, etc.
I have no idea what is going to happen. If I play it safe on my real estate investments, then I should just sell them now, before something breaks. OR, I can hold onto them and actually hope for more inflation of asset prices. But can real estate assets appreciate in this environment? Not as long as interest rates are high – no no. Real estate prices are dropping and interest rates are slated to increase yet again, so this is not a good time to buy property. Buying a depreciating asset as an investment is a risk, not an investment strategy, and owning a depreciating asset while interest rates are going up creates major uncertainty. But, buying property now might be the only opportunity some people have in the next few years, because again, interest rates are slated to increase again. Is it possible that we will just have elevated interest rates for a prolonged period of time (e.g. at least 2 years)? It\’s possible but the Fed has indicated that they don\’t want that situation, probably because they know that will result in a total collapse.
The 2008 financial crisis hit when property values dropped for only 1-2 years. This means they only have about 2 years to try their experiment. This suggests that 2024 will be a better time to buy a house, and this aligns with other economists\’ forecasts that 2023 will be a bad year for people. Interest rates will be high and property values will be decreasing, resulting in panic selling of properties at substantially lower prices than all-time-highs. Now looks like a really good time to get out of the real estate market.
The fed will claim that they helped to fix inflation because the shelter prices will drop but they will still be waiting there to bail out the squeakiest wheel that squeaks, and then they will drop interest rates and inflation will probably just surge higher afterwards because they will try to avoid a housing collapse in 2024. The interest rate chart does indeed show a \”gravity\” of interest rates getting lower and lower, and it\’s only a matter of time before we hit the bottom.
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