Really worrying that rich people are suddenly going to realize they are fine with 6 percent inflation forever so long as their wealth is protected and we go back to low interest rates. That’s going to suck for the middle class.
Turn on CNBC any day last week and I assume this week will be the same, they’ve already decided that. The derision with which they talk about Powell and the Fed is palpable.
I think ultimately it’s going to bite them one way or another. If the rate hikes stop to protect the banks/markets, then inflation remains too high. Sooner or later (and I think we’re probably in sooner territory on this), too many people run through savings and/or max out credit cards. You’d see consumer discretionary spending drop, and you’d see people tighten up their spending on staples as much as possible. Then you’d see corporate earnings suffer, which should cause the market to drop. You’d also see increases in bankruptcy and foreclosures - hey, what happens if foreclosures shoot up and some banks are overexposed to mortgage-backed securities?
My guess is that we’re going to see the Fed hike 25 bips on 3/22, and a mildly hawkish message from Powell. Like, no guarantee of a hike in May, but no guarantee of a pause either - a wait and see approach. I think they’re going to continue to hike rates, while injecting as much liquidity as possible through lending to banks.
On the one hand, rate hikes are deflationary and the lending is inflationary. On the other, if they’re lending to banks at 5% and the deal is that they’re letting them value underwater bonds and MBS’s at par value for collateral, is it really going to be inflationary in practice? It’s not like the banks can borrow at 5% and lend at 3%, so it’s really just letting them get through a liquidity crunch without having to realize losses on underwater assets.
I think it’s probably the right strategy, which doesn’t necessarily mean it’ll work as they hope, but it’s got a shot IMO.
I’m concerned they’re not going to raise at all on 3/22. If they raise 25 basis points on 3/22 I think that’s fine.
The Euro bank raised 50 bips, and the OECD urged central banks to keep raising rates due to some concerning inflation figures. I’d be somewhat surprised if they paused. That said, CME has the odds at about 52% hike, 48% pause.
Heard an interesting analysis on this that if they pause, it’s almost like ringing an alarm that they’re scared and could cause a crash anyway.
So I learned something interesting over the weekend. There’s a sizable group of Redditors, overlapping with the Wall Street Bets crowd, that thinks Silicon Valley Bank and Credit Suisse went under due to betting against GameStop. They are convinced that GME is going to the moon again FOR SURE, that it’s actually worth more than $16 a share, and that the shorts are all getting wiped out - and that this is causing the banking crisis.
A poker friend explained that to me and I asked why the banks were getting wiped out, and he couldn’t explain that but said it was 100% happening. I assume the theory is that the banks lent to the hedge funds and that a squeeze puts the hedge funds into a margin call and they lose a shit ton and go insolvent, which means the banks lose a shit ton? I mean, obviously GME is not worth significantly more than $16 a share. I’m bearish on it being worth $16, but whatever, maybe! But it’s not worth like $50 or $200, so at the end of the day as long as someone has enough liquidity to bail out the shorts for a handsome profit, I don’t see how this ends anything but poorly for the Diamond Hands Gang.
I also explained to him why banks were actually having issues, and he was like, “Yeah you know a lot more about that than me, I mostly just go on the Reddit to get hyped up and get excited because I know this is going to happen 100%.”
I 100% failed at trying to talk him into taking some of the 25% of his net worth he has in GME off the table. GL to them I guess, fuck the hedge funds!
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Bought SATS (EchoStar) at $18.88.
Tangible book $34.20, NCAV $19.40, P/E of 9, they’re about to launch a new satellite that will double their capacity and they expect to realize that gain over 2-3 years in terms of additional business. Capex should decline over that stretch, too. Major competitive threat is Starlink, but I actually think there’s also the opportunity to take business away because they do some gov’t business (small amount currently) and I doubt the DOD wants to be in business with Elon now. I don’t think SATS is a lock to get a lot of that business, not even close, but even if they just get a little of it, it would be quite profitable for them. Even Elon losing it to someone else would probably be very good for SATS as it would weaken Starlink.
They have a lot of debt (about 95% of market cap) at what used to look like bad rates - fixed rates in the 5-7% range. Now it doesn’t look so awful. They also have a lot of cash, about 100% of market cap. They’re currently moving away from buybacks and looking at M&A opportunities on low-earth orbit companies, and investing in their own growth. But, I expect either an accretive acquisition or significant buybacks over the next 2-3 years. Anything along those lines should be a major catalyst to realize the value here.
I think I agree with those guys as far as naked shorting going on, and brokers (particularly Robinhood) colluding to stop taking buy orders on meme stocks. But this sounds outlandish, and even if it’s true, I don’t think it’s hard to guess who’s going to be allowed to win and lose here.
Why would that be a concern? Why should they keep raising it rather than just let them stay flat? We keep reading articles about how consumers are tapped out in their credit and delinquencies are rising. Whatever consumer demand is supporting today’s prices should be waning. Maybe they should just see if the current rates are enough to stop inflation given a little time.
If it happens deflation is still a bigger issue than inflation and given the current news it also seems like it could be just as likely to happen over the next couple years as the current high inflation sticking.
Because theyve telegraphed they are bound and determined to throttle the labor market and it’s not been throttled.
Since they won’t stop for altruistic reasons, you’re left with them stopping because they’re being forced to.
That seems not a good reason? Maybe circumstances have changed since they made whatever statements about the labor market. Maybe one of the lessons of 2007 should have been that they raised rates too quickly from near zero and things got away from them?
Maybe Panicky Powell can be convinced to do the right thing for the wrong reason? Going bonkers with rate hikes to crush wages and the economy was dumb but maybe he can be convinced to stop to by fellow bankers fearing a financial crisis.
I’m going to guess that the 25 percent of his net wroth he has in GME was closer to 75 percent of his net worth a year or so ago.
Because long term inflation is far more damaging to the middle class (due to the inelasticity of middle class wages) than almost anything else.
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I’ve always understood that deflation is far more damaging to the middle class than inflation. Is there any data behind this concept of middle class wage inelasticity?
Do you really need me to find one of the numerous studies done over the past 50 years that have shown that middle class incomes have not kept up with inflation and have, in fact, lost purchasing power? Your post also assumes that significant deflation is inevitable with a financial collapse.
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I don’t have any expectations about what you will or should do. But you did made a claim that inflation was more damaging than ANYTHING ELSE. That’s a pretty strong claim and should have some support other than “oh yeah there’s data that shows wages haven’t kept up with inflation over the years”.
Like, how do you know that’s worse than a recession or lower overall growth? Have wages lagged more in high inflation environments than in low inflation environments?
Considering much of the middle class owns homes which will appreciate with inflation financed with fixed rate debt which will devalue in the high interest rates it’s not all bad for them. For those that have them, the fixed rate student loans will also become less of a burden.
In a deflationary environment the opposite happens. Existing debt becomes a bigger and bigger burden just as employment opportunities dry up, which kills consumption causing more unemployment in a nasty feedback loop.
I don’t think significant deflation is INEVITABLE but it might be just as likely as the high inflation of the last two years continuing with interest rates at current levels and a bigger potential risk.
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And also, wage inflation, especially at the lower end, is a significant part of this particular round of inflation. The reason we know this is that a large part of Panicky Powell’s commentary on “the data” the last few months has been that too many damn people have jobs and their wages are increasing too damn fast.
Could it to be that a disproportionately large generation, let’s call them “the Boomers,” have gotten old and left the workforce in recent years and also increased demand for healthcare workers and also we have stopped letting in immigrants that could fill the gap left by “the Boomers,” all of which have combined to give workers leverage for the first time in my entire life?
That seems like a dubious claim.
I wonder if consumer spending starting to slow. Within about 5 minutes got an email from American Airlines about “great prices” and some credit card increasing their intro promo bonus