Inflation & Interest Rates: share your data sources, models, and assumptions

[ChpBstrd]

I can't find a good source for credit card default rates (not late payments - defaults).  Maybe I need to retract the claim of highest defaults in 30 years until I have more than Twitter as the source of that.

How about these sources from FRED? They use the term "delinquency" instead of "default". Write-offs and balances are increasing rapidly, but they are generally just returning to the pre-COVID trend, IMO. I don't find these to be particularly alarming unless the trend continues.

The question of Covid money being spent matters to the strong consumer narrative.  In this FRED graph, I think Covid stimulus lead to the lowest default rates in 10 years.  If that is accurate, the U-shaped smile reveals Covid stimulus arriving (2020-2021) and then being spent (2022-2023).
https://fred.stlouisfed.org/series/DRCCLACBS

This is an interesting hypothesis - that we could use defaults as a proxy for where stimulus cash is in the economy. I always expected stimulus money to eventually trickle up from the least wealthy people to businesses and eventually to foreign central banks, but didn't know how to measure this migration. Delinquency rates might be a good measure of how many lower income households are having trouble paying their bills - meaning they are out of savings.

With Q2 delinquencies already above the pre-COVID plateau, I think we have a clear signal that almost all stimulus funds have left the hands of lower income maybe-third or maybe-half of the population. There are still likely some funds bouncing around between business owners and corporations, but these dollars eventually leave the US economy as imports are paid for. Foreign central banks then help local merchants trade USD for local currencies and put the USD into treasuries. The stimulative and inflationary effects decrease at every step of this conversion cycle.

The CC data say the debt jubilee is over and most consumers are now no stronger than they were pre-pandemic. We should expect their future consumption to be no stronger than it was back in the 20-teens. Yet total debt service as a percentage of income remains in low territory. This is due to low mortgage debt as a % of income. Consumer debt payments as a percent of income is at typical levels.

Pre-2021 homeowners are doing great but renters or recent buyers facing a rapid escalation in their housing costs. Of course the 65% of Americans who own their home are doing well at the expense of the financial institutions who lent to them!

I would additionally argue that {GDP} is even more misleading during elevated inflation.

There is also an argument to be made that people are making too much of record low unemployment while missing that labor force participation rate is still below pre-pandemic levels.

Inflation-adjusted GDP rose at 2.1% annualized in 2Q. Do you mean it is misleading because GDP growth just reflects consumers and businesses pulling ahead their spending to avoid price increases?

Labor participation has been unusually flat at 62.6% for each of the last 5 months. That's within a hair of where we were pre-COVID, and is about the same as we saw in the 2015-2016 era. What's unusual is how this data series has been flat for 5 months instead of bouncing around as it usually does. One interpretation is that we've reached a ceiling in the percentage of the population that can be mobilized for work, and we are at full employment. A previous 5-month plateau occurred from October 2019 to February 2020 at 63.3%, and that was the only 5-month plateau over at least the past 20 years.

I would have expected the post-COVID labor participation rate to have gone UP because the virus killed 1.17 million people, and most of these were retirees. Instead, the stock rally seems to have retired a lot of people.

[MustacheAndaHalf]

I can't find a good source for credit card default rates (not late payments - defaults).  Maybe I need to retract the claim of highest defaults in 30 years until I have more than Twitter as the source of that.

How about these sources from FRED? They use the term "delinquency" instead of "default". Write-offs and balances are increasing rapidly, but they are generally just returning to the pre-COVID trend, IMO. I don't find these to be particularly alarming unless the trend continues.

Thanks for searching.  I think "charge off" comes closest, but I don't see anything breaking multi-decade records.  At the very least, I saw some selectively shown data and internalized it too quickly.  I need to be more careful about my sources.

Maybe I saw something like this, "Charge-Off Rate on Credit Card Loans, Banks Not Among the 100 Largest in Size by Assets", which broke a 20 year record.
https://fred.stlouisfed.org/series/CORCCOBS

[EscapeVelocity2020]

I would additionally argue that {GDP} is even more misleading during elevated inflation.

There is also an argument to be made that people are making too much of record low unemployment while missing that labor force participation rate is still below pre-pandemic levels.

Inflation-adjusted GDP rose at 2.1% annualized in 2Q. Do you mean it is misleading because GDP growth just reflects consumers and businesses pulling ahead their spending to avoid price increases?

Labor participation has been unusually flat at 62.6% for each of the last 5 months. That's within a hair of where we were pre-COVID, and is about the same as we saw in the 2015-2016 era. What's unusual is how this data series has been flat for 5 months instead of bouncing around as it usually does. One interpretation is that we've reached a ceiling in the percentage of the population that can be mobilized for work, and we are at full employment. A previous 5-month plateau occurred from October 2019 to February 2020 at 63.3%, and that was the only 5-month plateau over at least the past 20 years.

I would have expected the post-COVID labor participation rate to have gone UP because the virus killed 1.17 million people, and most of these were retirees. Instead, the stock rally seems to have retired a lot of people.

I think defining recessions and economic health by GDP measurement is misleading.  I'm not an economist and I don't read full GDP reports, but when it was explained to me the first time that GDP falls when you have Wikipedia replace printing an distributing a bunch of encyclopedias, I stopped getting so excited about GDP growth slowing.  It gets even more confusing when you have the US (relatively high goods and services inflation) importing more from China (possibly deflationary) - although bad for US GDP, it is, on balance, good for the US economy.  Many renewable energy projects at my company have been cancelled because we have to buy US and inflation has made them unprofitable.

My ruminations were mainly me airing thoughts that whether we have achieved or are on the path to the fabled soft landing are much less clear than this booming stock market seems to think.  These are complicated economic times for long term investors...

[ChpBstrd]

There are plenty of reasons to expect a "bad" PCE report on Thursday.

• Commodities rallied hard in July.
• Retail sales rose to a new record high in July.
• Initial claims did not rise in July, and were generally lower than June, suggesting consumers were able to spend without inhibition.
• The majority of economic indicators, including residential sales, construction, retail profits, and more.

July 2023 PCE, annualized: 3.3%
July 2023 Core PCE, annualized: 4.2%

Both represent about a +0.2% monthly change compared to June.

My initial impression was "that's not as bad as it could have been" and maybe the markets agree. Odds of a September 20 rate hike have fallen from 19% a week ago to 11.5% today.

Still, this reversal contradicts narratives that policy is so restrictive  we're heading full speed toward deflation and need rate cuts by January. "Inflation rose last month" could become "Inflation is rising again". July's CPI and PCE numbers give the hawks ammunition.

The Personal Savings Rate plummeted from 4.3% in June to 3.5% in July! This is back down to levels we saw in November 2022, when Real PCE was dropping and it seemed like recession was right around the corner. Now Real PCE is rising and the savings rate is going down too as money supply is flat-to-rising. Retail sales are rising and initial claims have been below 250k each week since late June.

All this suggests to me that markets continue to underestimate the odds of rate hikes, as they've been doing since 2021. We could see a quarter point in September and then another quarter in December, and that would be consistent with the Fed's recent every-other-month cadence. Yet the odds of a 6% FFR upper limit by January are currently only 3.1%. That currently unimaginable rate would only put us right in the middle of the range James Bullard was warning us about in 2022.

[reeshau]

Core PCE is only up because July 2022, an abnormally low 0.1% MoM, rolled off.  The monthly number was the same as June.  The last 3 months have averaged an annual rate of 2.8%.

More important to me, August 2022 was 0.6%--highest in the last 12 months.  And, September was 0.5%.  If we lap these with the same 0.2-0.3% MoM numbers, the annual Core PCE will be in the mid 3's in 2 months.

[ChpBstrd]

Conflicting / confusing information just arrived from the employment situation report.

Unemployment rose from 3.5% in July to 3.8% in August.

Labor force participation rose from 62.6% where it had been stuck for 5 months to 62.8%. We're now back to the participation conditions prevalent in 2016-2018.

Most job gains came from the service sector, while transportation and IT shrank.

So to summarize recent data, almost all the last holdouts or long-COVID victims are back in the jobs market. People are also spending heavily and running up credit card debt. Homeowners are staying put and renters who want to be homeowners face a massive economic barrier. The last of the 2020-2022 stimulus money has probably left the pockets of the poor and working class populations.

Some hypotheses to think about:

-It may be a different economy for pre-2021 homeowners versus renters, with the third of Americans who rent facing more rapidly escalating costs of living than the pre-2021 homeowners. Aggregate statistics might average out these impacts or deliver confusing contradictions because some metrics reflect more or less of each demographic. For example, we could interpret rising credit card debt and defaults as a sign of vigorous consumption by the homeowning class or as a sign of desperation by the renter class. It could be both at the same time. If the renter class gets into financial trouble it will probably be enough to put the economy into recession even if the homeowners are propping up other metrics, like the debt payments to income ratio. Similarly, is the falling savings rate due to homeowners' spending or is it renters' desperation or is it both? The difference in these narratives could be the difference between an accurate vs. inaccurate prediction on the recession question.

-The combination of low initial claims, rising unemployment, and a rising labor participation rate could be explained as "more people who were not previously looking for work and with no basis for an unemployment insurance claim entering the workforce and not being employed yet, thereby contributing to the unemployment rate but not initial claims or GDP."

-An economy that is quickly shifting from goods to locally-produced services might also be becoming more resistant to influence from what might be an actual recession in China, and what certainly is a recession in much of the Eurozone. This is probably a small effect, but I think the soft landing scenario might depend on this sort of decoupling being a big effect. Both imports and exports are down slightly since mid-2022.

-The US trade deficit has been shrinking since March 2022 - the onset of rate hikes. The trade deficit is still much higher than it was pre-pandemic, but is going down every quarter. Consumers cutting back would not make sense because a relatively strong USD should make imports a bargain for US consumers. Indeed, the detailed data show "consumer goods" imports are actually up since December 2022. The biggest decline in imports YTD comes from the "industrial supplies" category (-3B since December 2022, which was itself down -2B since September 2022). This combined with flat inventories suggests US businesses are putting a hold on expanding their spending - maybe because they are facing bond maturities and need to deleverage instead of taking on massive new interest expenses.

[ChpBstrd]

Initial claims keep falling. We're now back to levels that prevailed in February 2023. I think today's report might mark the start of a trend.

Initial claims is a metric which should be on any short list of recession predictors. Each of the recessions since the 1980s was preceded by an uptick in initial claims, and the absolute levels tended to be >300k per week. In contrast, today's release was 216k and there is no up trend. This is solid evidence for the soft landing camp.

Looking further out, these levels of initial claims are unusually low across the last few decades. There's clearly a surplus of jobs available right now, and that could bid wages up. Claims have only been this low in 2018, 2019, 2022, and 1973.

Meanwhile the NFCI continues to fall - yet another anti-recessionary signal.

I've thought for most of this year that the Fed should stop hiking rates, because real rates are significantly positive and restrictive. The data are calling that perspective into question, and threatening a melt-up situation instead. If we're at least 10 months away from a recession, as the data suggest, that's a lot of time for another rate hike or two to occur. It's also a lot of time for wage pressures to translate into wage inflation. So far, wage increases have trailed inflation, and the gap has been corporate profits - but how long can this continue? And as the FFR cuts everyone once expected to occur by 1Q2024 at the latest slip further and further away from possibility, how many more companies will be forced into refinancing their bonds in a higher-than-expected rate environment?

The problem is, I know companies have spent the last 15 years investing in low-ROI projects financed by low-interest debt, and by increasing leverage to maintain a decent ROE. Those projects and that leverage no longer make sense, and companies have had very little time to adapt. Now their bonds are coming due amid a falling earnings trend, so it seems odd to see them fighting for employees or engaging in growth projects now. Yet here they are, doing exactly that!

I am considering increasing my exposure to small caps (e.g. VB), mid caps (e.g. VO), and maybe energy (e.g. XLE) on the following rationale: The data are simply not supporting the hard landing scenario and these sectors' valuations are near the bottom of their forward PE ratio range for the past 25 years. If we're in dangerous territory, but also potentially a period of rapid economic growth, these stocks should benefit in the economic growth scenario and suffer less damage than the megatech-dominated large cap indices if things go south. The downside is they are more costly to hedge, compared to SPY.

Then again, the 2004-2006 rate hikes didn't result in a recession until about 5 quarters after the peak FFR had been achieved, so maybe bears should be more patient. Since the rate hikes began, markets have continually been wrong about how high rates would go and how soon we'll see rate cuts. Per late last year's Fedwatch tool, we should be seeing rate cuts already instead of talk about more hikes! A lack of patience could sucker investors into a false dawn before inflation-fueled growth slows down.

----------------

One more note - this summer's strong series of economic data coincide with a reversal in the trend for M2. Money supply is now going up due to people parking cash in money market funds. If sentiment swings back to greed, there is a LOT of liquidity sitting out there which could flood back into the stock market.

Perhaps investors are anticipating a correction, which will lead to rate cuts, which will set the stage for an epic rally? If that narrative even starts to play out or if the Fed starts giving their typical 6 months' notice about rate cuts, the flood of money might quickly extinguish any correction. Things might not go according to plan if we experience a burn-up with low unemployment and rising wages instead.

[MustacheAndaHalf]

I can't find a good source for credit card default rates (not late payments - defaults).  Maybe I need to retract the claim of highest defaults in 30 years until I have more than Twitter as the source of that.

I finally stumbled across it on Twitter/X today:
"Delinquency Rate on Credit Card Loans, Banks Not Among the 100 Largest in Size by Assets"
https://fred.stlouisfed.org/series/DRCCLOBS

From 1995-1996, late CC payments spiked but were not followed by recession.
2000-2001 rise in late CC payment preceded recession (and the dot-com crash)
2007 spike was followed by recession (and great financial crisis)
2017 spike did not lead into recession, but late payments remained high in 2018
2019 payments went from a high starting point to the 2nd highest late rate on record (7.2%)
 ... which was followed by the Covid-19 recession of March 2020.
The highest late CC payment rate on record was 2023 Q2 ... aka "now".

The majority view right now is of a soft landing.  The economy is growing quickly, which is the opposite of recession.  I wouldn't argue the past few months have added data which show a potential path to a soft landing, but I interpret it differently.

I think people overspent, which is what the late CC payments show.  They felt pressure last year as the Fed raised rates from 0% to just over 4%.  Many countries had travel restrictions from Covid, which were gone by this summer.  The result, after years of restrictions, was record levels of travel this summer.  So I expected good data from July and August.

But now I expect a pullback.  Just as the summer set records and surprised predictions, now I expect the pullback to surprise investors.  Record levels of travel financed by record levels of late credit card payments.  Now I think we're in for a pullback that will be as strong as the travel boom.  Travel surprised investors, and now a lack of consumer spending will surprise investors.  Not only are those payments late, but high inflation makes late balances grow faster.

I'm still not confident enough to make a Game of Thrones quote, but I did shift my portfolios to more bearish this week.  Alright, I'll say it prematurely: Winter is Coming.  The problem is I don't know if it's winter of 2023... winter of 2024 or winter of 2025.

[ChpBstrd]

@MustacheAndaHalf you've uncovered something interesting. I was unalarmed in an earlier post when I looked at "Delinquency Rate on Credit Cards: All Commercial Banks" because by that metric we are still in historically low territory. However if we look at "Delinquency Rate on Credit Cards, Banks Not Among The 100 Largest in Size by Assets" we get a very different picture!


My initial take is that it appears smaller banks are doing a far worse job controlling delinquencies than larger banks. Maybe they go after less creditworthy customers? My second take is that it appears smaller banks have had higher delinquencies in particular since 2016. This didn't lead to a banking crisis or recession then, so maybe it won't matter now. 

I'd like to know how big the markets are for the largest 100 vs. smaller banks. It the smaller banks represent a tiny fraction of the market, maybe their higher defaults don't matter except as a canary-in-coal-mine way, providing us information about consumers at the lower end of the credit spectrum. Turns out there is a metric for delinquencies just for the top 100 banks. If we overlap this delinquency rate over the "all commercial banks" rate, it's almost a perfect match. This could only occur if the smaller banks had a very, very small slice of the market.


I remain unalarmed, but the research has been very informative. It's something to think about as I look at small bank stocks and preferreds. Maybe they were reaching for yield in the ZIRP era and now they have some serious liabilities on their books. If delinquencies are this bad for them during a period of full employment, just imagine a recession. Paging @chasesfish to check these insights.

[ChpBstrd]

Here's an interesting read about yield curve inversion:
https://www.marketwatch.com/story/heres-what-seven-decades-of-the-yield-curve-says-about-the-business-cycle-and-the-stock-market-strategist-says-6983d62e?mod=home-page

...research shows in nearly seven decades there has never been a post-inversion equity rally that was not completely reversed going into subsequent recessions/bear markets.

Not even recent action is unprecedented. U.S. stocks rallied 20% from when the yield curve inverted in July 2022 to July this year. But such bounces have happened before, in 1989-90, for a gain of 24%, and 2006-07, up 23%, and both times the post-inversion rallies were wiped out.

“On average, equity markets ‘bottomed’ about 20% below where they were when the curve first went into inversion. The range of outcomes would be consistent with the S&P 500 having more than 20% downside from the recent market highs,” Darda says.

“In short, those who are ‘doubling down’ on the soft landing/ongoing bull market call now are making a wager on an unprecedented occurrence.”

[MustacheAndaHalf]

If you look at the overall rate of late CC payments, won't that signal arrive too late?  If the overall rate of late payments becomes alarming, everyone will know that's a problem.  The question is what signals can predict events before everyone knows.

I'm also thinking the non-100 banks have less creditworthy customers - marginal credit situations.  Local banks can look at each person, but national banks just impose the same requirements for everyone.  The divergence in late payments is further evidence there is something different.

Agreed that from 2017-2019, the non-100 banks and top 100 banks diverged in their late CC payment rates.  I expect that was primarily driven by the end of the 0% rate era.  From 2017-2018 the Fed raised rates.  During 2019 the Fed kept rates for half a year, then began lowering them.
https://fred.stlouisfed.org/graph/?g=18Cqy
https://fred.stlouisfed.org/series/FEDFUNDS

It's a fair question to ask how important are the non-100 bank customers to the overall economy.  I don't have a graph to answer that.  But you can't assume those with the lowest and highest credit scores spend equal percentages of their money, or spend at equal speeds.  Those living paycheck to paycheck are spending their money faster than those who save up.  But I don't know the amount and velocity of that money through the economy.

[FIPurpose]

August CPI forecast:
CPI: 3.6% (+0.4%)
Core CPI: 4.3% (-0.4%)

I'd say it looks like August's report continues to be positive information for the economy. I'm also hoping that this also is the beginning of mortgage rates starting to cool a little as well. I hope we make it back down to 6% by the end of the year.

[blue_green_sparks]

Work-from-home levels are still elevated despite Elon Musk and many downtown real-estate owner/lessors and smaller banks are about to be tested with new rates soon. This is a so-called "Wall of Debt".  The Federal student loan pause is ending in Oct. With rising energy futures and an Aug unemployment spike, maybe we are not out of the woods yet.

[ChpBstrd]

August CPI: +0.6% (+3.7% annualized)
August Core CPI: +0.3% (+4.3% annualized)

https://www.bls.gov/news.release/cpi.nr0.htm

This is a bad report by any measure, but markets might make the excuse that energy commodities drove the numbers, with a 10.5% increase in the month of August. Shelter inflation continued to fall, hitting +0.3% in August. That's still higher than the Fed's 2%/year mandate, but it's moving in the right direction.

[achvfi]

An anecdote from midwest. Since late July expensive homes are not selling like hot cakes. Anything listed over 400K is seeing significant price reductions, 10-20%.

If labor market catches cold I think we will see even more price reductions.

[FIPurpose]

An anecdote from midwest. Since late July expensive homes are not selling like hot cakes. Anything listed over 400K is seeing significant price reductions, 10-20%.

If labor market catches cold I think we will see even more price reductions.

I think what we'll see is a dichotomy of winner and loser cities. A lot of people moving with remote work. With more and more workplaces looking to enforce a return to office, I think we'll see some cities be able to maintain their new workers becoming larger than before, and other cities will not be able to maintain the influx of workers as a downturn in the economy might force workers to give up on their remote jobs and move back to a job hub.

I think on balance that may look like half of cities continuing to go up in price +5% per year and other cities starting to trend down 5% per year.

[ChpBstrd]

An anecdote from midwest. Since late July expensive homes are not selling like hot cakes. Anything listed over 400K is seeing significant price reductions, 10-20%.

If labor market catches cold I think we will see even more price reductions.

I think what we'll see is a dichotomy of winner and loser cities. A lot of people moving with remote work. With more and more workplaces looking to enforce a return to office, I think we'll see some cities be able to maintain their new workers becoming larger than before, and other cities will not be able to maintain the influx of workers as a downturn in the economy might force workers to give up on their remote jobs and move back to a job hub.

I think on balance that may look like half of cities continuing to go up in price +5% per year and other cities starting to trend down 5% per year.

I suspect it is as simple as (a) the high end market ran out of wealthy buyers who are not already homeowners holding onto <4% mortgages, and (b) those currently in the market for a house are only making lateral moves to pursue jobs, and cannot afford to upgrade amid high interest rates.

Regarding WFH, I think it's here to stay and the days of cities being thought of as "job hubs" are over - at least for information workers. The rationale for living in a HCOL city appears to be shifting away from economic incentives and toward a desire for cultural-economic segregation and/or proximity to popular amenities. That's what people have told me on this board.

This housing bubble is a lot different than the 2005-2007 bubble, in that the WFH economy has suddenly propped up housing prices everywhere, including in places where lots of people believe there are no jobs (which of course was never true, judging by the lack of mass starvation.). IMO, it is the cities that grew pricey and congested during the last 100 years of physical office culture that have had the rationale for their high prices undercut. The Midwest remains a great place to live while fully participating in the information economy - from home.

In the event of a downturn, I suspect physical office jobs will be more vulnerable than remote jobs, simply because they cost more.

[reeshau]

Another anecdote: a young family, staying temporarily with my neighbor, is repatriation from India.  Both are employed in the oil industry, which is of course common here.  There are somewhat choices for them that they quickly turned to a builder.  This meant they stayed in temporary housing for an additional 2 months, but because the house was under construction (a spec build) it wasn't much longer.

With rents sky high and homeowners only moving when necessary, this is the kind of thing that counts as a normal transaction.  New builds, typically 10% of annual home sales, are now 30% and climbing.

[FIPurpose]

In the event of a downturn, I suspect physical office jobs will be more vulnerable than remote jobs, simply because they cost more.

My guess is the opposite. People with remote jobs will be seen as detached from the company. I would not underestimate a company's ability to make arbitrary lay-offs and if they see the ability to simplify their workforce by chopping off everyone who is not willing to return to the office. Consider the amount of unemployment/severance companies may be able to also save "laying off" their remote workers.

Consider also that remote work pushes salaries up making greater competition across localities. I think large companies will see a strong pressure to try and return to the old model where they are able to push smaller salaries on their satellite offices.

The office space for most remote workers is a fixed cost, and I doubt they are saving much by having a nominal number of workers outside of the office. Now I'm really considering companies with 0-20% remote workers. It's a very different choice for 50-100% remote companies.

Perhaps remote work cannot be put in the bag, but I wouldn't be surprised to see a strong attempt to snuff a large majority of it out.

[wageslave23]

In the event of a downturn, I suspect physical office jobs will be more vulnerable than remote jobs, simply because they cost more.

My guess is the opposite. People with remote jobs will be seen as detached from the company. I would not underestimate a company's ability to make arbitrary lay-offs and if they see the ability to simplify their workforce by chopping off everyone who is not willing to return to the office. Consider the amount of unemployment/severance companies may be able to also save "laying off" their remote workers.

Consider also that remote work pushes salaries up making greater competition across localities. I think large companies will see a strong pressure to try and return to the old model where they are able to push smaller salaries on their satellite offices.

The office space for most remote workers is a fixed cost, and I doubt they are saving much by having a nominal number of workers outside of the office. Now I'm really considering companies with 0-20% remote workers. It's a very different choice for 50-100% remote companies.

Perhaps remote work cannot be put in the bag, but I wouldn't be surprised to see a strong attempt to snuff a large majority of it out.

I was actually saying this same thing today in a group text. The companies that are trying to push hybrid and in office work are seeing high employee turnover. I think its because employees are in high demand so they can demand remote work and companies are reluctantly granting it because they have to in order to fill positions.  But once the next recession hits, those same employees will lose a lot of leverage and will be forced to come into the office if their company demands it. And it seems like most companies still prefer in office workers. 

I also think the mass exodus from hcol areas is overblown.  I know of only two people that moved from a place like San Francisco to Florida during the pandemic because they could work remote.  Both of those people have had to move back to the high cost city when their companies demanded hybrid.  I think only about 20% of workers are 100% remote. And if you think of the typical family they have two wage earners, so both would have to be 100% remote which even more decreases the potential moving pool. I'm 100% remote and would love to move to a low cost area, but my wife would make $30k less and we'd save maybe 15k moving from our medium cost of living area. Plus we wouldn't move because my brother and sister in law and nephew live here. My sister in law is 100% remote but my brother would take a similar 30-40k paycut if they moved.  My parents are retired and could live anywhere but they don't want to move away from their kids and grandkids.  All this to say, I don't think there are all that many people who will move because of remote work.

[Mr. Green]

Where we've been staying near Denver for the last month, a Walmart is the closest grocery store. We are seeing tons of rollbacks on regular grocery items across the board to the tune of 10-20%. Sure feels like a "we raised prices because fuck you and now that things are returning to normal-ish we're pre-emptively lowering them back to our regular profit margins before people take their money to lower cost brands." I guess this answers the question of whether we'd ever see prices actually come down once greedflation was curtailed.

[EscapeVelocity2020]

We're the opposite of Mr. Green, we live in an area that is growing by leaps and bounds.  Insurance prices are up, water and electricity are up, food prices are up, home prices / rent are up, property taxes are up...  basically everything keeps going up - and yet people keep buying all the new homes!  Our once LCOL is now medium-to-high COL, many of the things I mentioned are up 50 - 100% what they were in 2020 pre-inflation.

[ChpBstrd]

The market's reaction to today's hotter-than-expected inflation report is a bit baffling. The S&P actually finished higher after the +0.6% CPI report and the CME Fedwatch tool actually lowered the odds of a September 20 rate hike from 8% to 3% in one day! That's an odd way to respond to the second month of reversal in the Fed's campaign against inflation.

Financial media, for what it's worth, reported "The Fed will look past inflation uptick" because the economy is slowing and it's just energy prices, and all the other things that could have been said in 1973. And yes, the 1970s inflation roller coaster is exactly why the Fed will be looking upon this two-month trend with a wary eye.

We are in the usual pre-meeting blackout period, but I wonder if the FOMC members could talk what would they think about the market's near-absolute confidence in no September rate change? Isn't 3% odds a bit low, given the data, given the memory of the 1970s, and given that rates still haven't exceeded the peak of inflation like happened every other time inflation was controlled by interest rate action?

I'm not saying a rate hike is probable. I'm saying the odds should be a lot higher than 3%. 25%-35% seems more reasonable to me, and the VIX should absolutely be higher than 13.5.

A better explanation is that the Fed uses Core PCE as their preferred inflation gauge, and investors think Core CPI provides a hint about what Core PCE will look like when it is reported on Sept. 29. Core CPI has now been on a 3-month trend of negative inflation. So one could say even if food and energy are jumping around, we can expect another +0.2% Core PCE reading when it is reported on September 29, if not +0.1%.

Still, this whole deep belief that rate hikes are done looks a lot like groupthink to me.

---------------

In other news, the NFCI fell even farther away from recession-warning territory, despite reports of higher defaults and delinquencies, and of banks clamping down on loans. I wonder if this signal is still relevant.

[MustacheAndaHalf]

One of the most frustrating things I saw recently was Paul Krugman tweeting about low inflation - with no reference to core.  Admittedly Twitter/X doesn't allow as much room for context, but I just feel economics should consistently provide that context.

Core CPI has continued to fall, even as energy inflation remains harder to predict.  The key question for me is when does core CPI & PCE stop falling.

[reeshau]

The key question for me is when does core CPI & PCE stop falling.

It won't be before October, as we are lapping 0.6% August 2022 and 0.5% September 2022 monthly numbers.

[EscapeVelocity2020]

Wholesale inflation posts biggest increase in 14 months, PPI shows

The numbers: U.S. wholesale prices jumped 0.7% in August to mark the largest increase in 14 months, fueled by rising energy costs, in a sign inflation is likely to persist for a while.

Economists polled by the Wall Street Journal had forecast a 0.4% increase in the producer price index.

[vand]

Probably not news to anyone who is able to read between the lines, but the tightening cycle is likely already over:

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

- we are now in pause mode now
- slight upward bias over the next 3 months, so 1 more hike is possible (but not likely)..
- .. but that switches to a downward bias by summer 2024
- By Dec 2024 there is a 2% chance that rates will still be at current levels or higher


Personally, if I were a to have to bet, I would take the unders and betting that rates will be below 3.5% by Dec 2024.  A lot can happen over the next year, and we have seen how quickly the Fed will cut rates to zero if we enter a deflationary recession.

Risk/reward on that bet would be huge. Vault this for Christmas 2024.

[daverobev]

Probably not news to anyone who is able to read between the lines, but the tightening cycle is likely already over:

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

- we are now in pause mode now
- slight upward bias over the next 3 months, so 1 more hike is possible (but not likely)..
- .. but that switches to a downward bias by summer 2024
- By Dec 2024 there is a 2% chance that rates will still be at current levels or higher


Personally, if I were a to have to bet, I would take the unders and betting that rates will be below 3.5% by Dec 2024.  A lot can happen over the next year, and we have seen how quickly the Fed will cut rates to zero if we enter a deflationary recession.

Risk/reward on that bet would be huge. Vault this for Christmas 2024.

What are your thoughts on the Bank of England, ECB, BoJ..?

[vand]

Probably not news to anyone who is able to read between the lines, but the tightening cycle is likely already over:

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

- we are now in pause mode now
- slight upward bias over the next 3 months, so 1 more hike is possible (but not likely)..
- .. but that switches to a downward bias by summer 2024
- By Dec 2024 there is a 2% chance that rates will still be at current levels or higher


Personally, if I were a to have to bet, I would take the unders and betting that rates will be below 3.5% by Dec 2024.  A lot can happen over the next year, and we have seen how quickly the Fed will cut rates to zero if we enter a deflationary recession.

Risk/reward on that bet would be huge. Vault this for Christmas 2024.

What are your thoughts on the Bank of England, ECB, BoJ..?

The term structure is pretty similar across Fed/BoE/ECB notes, so can be applied to all.

That said, the overall probability is that we will have 1 more hike...
If you multiply the probability of it remaining at current level or lower between now and March the chances are very slim... the market is fairly certain that we're going to see 5.75%, it's just not confident what particular month the hike will happen (and yes I am aware that slightly contradicts my assertion that we're in pause mode... haha)...

[ChpBstrd]

The Fed's dot plot released today suggest the FFR will be around 5% at the end of 2024. By the end of 2025, 3.5% to 4% seems to be the consensus range.

That would mean mortgage rates stay over 6% for at least another year.

Higher for longer should make us think about whether we expect yield curves to stay inverted for another year, or if we think long-term rates will rise and close the gap, as has been happening for several months now. The former seems unlikely, given that we're already approaching month 12 of inversion in the 10y/3mo yield curve - and such inversions tend to last less than a year. The last time the 10y/2y yield curve inverted for more than the current 14 months was 1978-80, and that went on for 16 months before the recession started.

As I've noted before, yield curve inversions have historically ended when short-term rates are cut, not because long-term rates rise. This time is different in that the 10y/3m yield curve has moved up 67 basis points since its May lows due to a +71bp increase in the 10-year yield.

We can look at treasury records to verify the 3 month yield only moved 4 bp during this whole time while the yield curve was rising, so the 10y yield is doing all the work with its 71bp rise.

That trend could continue if the economic data remain strong, because continued strength would raise questions about the validity of recession calls and the post-pandemic neutral rate of interest for the next several years. The people accepting 4.35% for 10-year treasuries today are betting that 4.35% will equal the discount-weighted average short-term yield over the next 10 years. That is to say, they've raised their estimate of the neutral rate over the past few months. JPOW said we've achieved a restrictive policy stance, but the market is watching the growth numbers and thinking maybe not.

Everyone (including myself) is expecting the yield curve to un-invert when the economic data start to decline and the Fed cuts rates right before a recession starts. But there's another way this could play out: Yield curves un-invert as the 10-year rate rises to exceed short-term rates like the FFR!

The latter scenario might look different than any of the recessions of the past 40 years because rates would be rising instead of generally falling. It won't be a pretty picture for stocks, bonds, or real estate if ten-year treasuries reach 5% or 6% - especially considering recent price run-ups and historically high valuations for both stocks and R.E. Falling asset values could mean a new bank crisis, as in 2007, but this time the interest rate increases are bigger, they happened faster, and they devalue all assets, not just R.E.

So my current scenario set is:

1) Economic indicators turn downward in 2024. Short term rates are cut as we approach recession.
2) Soft landing - no recession, no financial crisis. Earnings leap and adjust to higher interest rates as companies raise prices. Inversion persists as investors expect rate cuts and falling inflation.
3) Long term rates rise and destroy asset values. Then a banking crisis leads to recession.

The temptation is to buy a straddle or strangle to bet on all 3 possibilities at once, winning with a big move in either direction. The reason not to do so is that assets are arguably already priced for scenario 2, and their appreciation could be flat if that occurs.

[wageslave23]

Do you think the reason inversion has lasted so long without a recession is that while the fed is raising rates, congress has been stimulating the economy with spending? Seems like the government is giving a mixed message, while one hand takes away (fed) the other hand gives (congress). So it's either diluting the strength of the feds tightening or its just prolonging the process.

[FIPurpose]

Bonds are creeping up a little but not much. Agency bonds in the 10-20 year range look to be going around 5.2%-5.4%.

As long as rates stay above my personal mortgage rate though, bonds don't seem to be a bad buy all around.

Whether the outcome is recession or soft landing, bonds seem to be the right choice.

[ChpBstrd]

Do you think the reason inversion has lasted so long without a recession is that while the fed is raising rates, congress has been stimulating the economy with spending? Seems like the government is giving a mixed message, while one hand takes away (fed) the other hand gives (congress). So it's either diluting the strength of the feds tightening or its just prolonging the process.

Keyensian interventions certainly work. We have the crises of 2008 and 2020 as evidence. Without massive government spending infusions, either of those events should have turned into a depression. With the interventions that happened, both dire situations turned around within a few months of the interventions.

Is high government spending propping up the economy now? That's a tricky question because government spending as a % of GDP has been falling rapidly since 2020. The CBO estimates federal outlays will comprise 23.7% of GDP in 2023, compared to 31.1% in 2020. Spending / GDP is still significantly higher than it was in, say, 2018 or 2019 when government was ~20% of GDP.


Most economists would agree that if government (as 23.7% of GDP) reduces its spending, then logically we should expect a proportional reduction in GDP, unless private sector activity out-grows the reduction in government activity. This is where one's politics take over: A small-government conservative or libertarian might say government spending and deficits reduce growth, and so the reduction in the size of government over the past 3 years is why we're seeing growth. A liberal might say we can't austerity ourselves to prosperity (see the UK for an example) and all this reduction in government spending is just moving us closer to a recession.

I think the real answer is more nuanced, and involves a dance between money supply, monetary velocity, real interest rates, and the behaviors of large numbers of people. These dynamics are so complex I struggle to understand them - hence my attempts in this thread.

I do know that the broad money supply was falling until last April when a new system of bank bailouts started, that monetary velocity seems to be accelerating beyond what one might suspect from the effects of reduced money supply alone, and real interest rates are higher than they've been since 2007.

Whereas government spending is trending back toward close to its norms, a lot of other metrics like M3, M2 velocity, yield curves, inflation rates, S&P500 earnings, etc. are swinging around wildly. Plus, government spending trends are not really predictive of recessions, so it's not my focus.

Banking is another area I'm watching more closely than government spending, because the banks have taken a massive hit on bonds, could be about to take another massive hit on RE loans, and are dependent at this point upon expensive government-supplied liquidity to maintain confidence. I see banks as vulnerable to more deposit reductions, which could quickly flip their ratios in a negative direction and reduce lending liquidity.

[wageslave23]

This is interesting and I've heard this before.
https://www.msn.com/en-us/money/markets/the-fed-s-inflation-read-is-dead-wrong-that-s-why-a-2024-downturn-looms-says-professor-who-pioneered-popular-recession-predictor/ar-AA1h6aKF?ocid=hpmsn&cvid=d3d4fc9ee1fc4dab857051335dbbc463&ei=10

Seems like the fed would know this too though. 

[FIPurpose]

This is interesting and I've heard this before.
https://www.msn.com/en-us/money/markets/the-fed-s-inflation-read-is-dead-wrong-that-s-why-a-2024-downturn-looms-says-professor-who-pioneered-popular-recession-predictor/ar-AA1h6aKF?ocid=hpmsn&cvid=d3d4fc9ee1fc4dab857051335dbbc463&ei=10

Seems like the fed would know this too though.

Thanks for the article and this guy's take really resounds with me. On the one end, you can't just completely ignore shelter costs and say "well inflation is normal", but also you can't tank the rest of the economy just because one piece is out of whack.

This goes back to the Executive branch largely has one hammer to fix the economy, and a larger overall housing policy and funding is what is really needed to get costs under control. This has always come down to congress being unable to effect change. We saw that the Inflation Reduction Act has done wonders in bringing down the costs of renewable energy solutions, we need something similar for housing. We need a major bill for the creation of dense housing, and better national regulations around NIMBY's shutting down projects for improved housing.

I think the fear for the fed though is that if rates are lowered now, then it creates room for RE to continue skyrocketing even further. And until the public at large believes that the 7% mortgages they are buying won't be refinanced at 4% next year, then prices have a better chance of slowing. But the author is right that that comes at a cost.

[ChpBstrd]

This is interesting and I've heard this before.
https://www.msn.com/en-us/money/markets/the-fed-s-inflation-read-is-dead-wrong-that-s-why-a-2024-downturn-looms-says-professor-who-pioneered-popular-recession-predictor/ar-AA1h6aKF?ocid=hpmsn&cvid=d3d4fc9ee1fc4dab857051335dbbc463&ei=10

Seems like the fed would know this too though.

Cambell may have a point. The Fed's preferred metric for inflation is Core PCE, which is PCE after removing food and energy. The rationale for doing so is that food and energy prices are too volatile. Housing has never been particularly volatile until now, so housing has always been included - and weighted heavily - in Core PCE.

I would argue housing costs have suddenly become as volatile as some commodities. The median sale price of houses in the US has increased 29% in just three years - and that's after median housing prices have fallen 13.2% since 4Q2022! Meanwhile rent inflation has gone from being stable to being a roller coaster. TTM rent inflation went from +1.8% in 2021 to +8.8% in 2023.




All this contradicts the idea some categories of things are permanently non-volatile, and it calls into question the practice of carving out volatile things to make "core" measures and get at the "underlying trend" of inflation. Shall we now carve shelter out of Core PCE, as Harvey Cambell illustrated? What, exactly, would that leave behind? Or do we keep making excuses for volatile categories of inflation - like Arthur Burns did in the 1970s with oil and food price spikes - and now expand our set of excuses to housing? At some point I think it makes more sense to just look at CPI/PCE as a whole, rather than narrating ourselves into trouble.

There's a separate argument that rent and house price inflation is on a rapid downturn, but that we're not measuring it correctly because of lags, such as the time it takes for leases to expire or houses to sell. Those who promote this argument, like Harvey, think inflation is overstated because new leases are being signed at lower price increases than before, but most people are still stuck in leases from up to a year ago.

The flipside of this argument is that insurance costs - including health insurance - are lagging behind inflation even further. There are good reasons to believe health insurance costs are about to skyrocket. Reduced health insurer margins reduce reported healthcare inflation, and so far insurers have faced rapidly rising costs while their premiums have been locked in. For consumers, this is the flipside of what renters are suffering. So maybe rent inflation falls while health insurance inflation rises quickly.

Again, we're in a position of using competing narratives to make predictions instead of simply looking at the overall inflation rate, and counting some categories as "core" while ignoring other categories. Very Arthur Burns like.

[wageslave23]

This is interesting and I've heard this before.
https://www.msn.com/en-us/money/markets/the-fed-s-inflation-read-is-dead-wrong-that-s-why-a-2024-downturn-looms-says-professor-who-pioneered-popular-recession-predictor/ar-AA1h6aKF?ocid=hpmsn&cvid=d3d4fc9ee1fc4dab857051335dbbc463&ei=10

Seems like the fed would know this too though.

Cambell may have a point. The Fed's preferred metric for inflation is Core PCE, which is PCE after removing food and energy. The rationale for doing so is that food and energy prices are too volatile. Housing has never been particularly volatile until now, so housing has always been included - and weighted heavily - in Core PCE.

I would argue housing costs have suddenly become as volatile as some commodities. The median sale price of houses in the US has increased 29% in just three years - and that's after median housing prices have fallen 13.2% since 4Q2022! Meanwhile rent inflation has gone from being stable to being a roller coaster. TTM rent inflation went from +1.8% in 2021 to +8.8% in 2023.




All this contradicts the idea some categories of things are permanently non-volatile, and it calls into question the practice of carving out volatile things to make "core" measures and get at the "underlying trend" of inflation. Shall we now carve shelter out of Core PCE, as Harvey Cambell illustrated? What, exactly, would that leave behind? Or do we keep making excuses for volatile categories of inflation - like Arthur Burns did in the 1970s with oil and food price spikes - and now expand our set of excuses to housing? At some point I think it makes more sense to just look at CPI/PCE as a whole, rather than narrating ourselves into trouble.

There's a separate argument that rent and house price inflation is on a rapid downturn, but that we're not measuring it correctly because of lags, such as the time it takes for leases to expire or houses to sell. Those who promote this argument, like Harvey, think inflation is overstated because new leases are being signed at lower price increases than before, but most people are still stuck in leases from up to a year ago.

The flipside of this argument is that insurance costs - including health insurance - are lagging behind inflation even further. There are good reasons to believe health insurance costs are about to skyrocket. Reduced health insurer margins reduce reported healthcare inflation, and so far insurers have faced rapidly rising costs while their premiums have been locked in. For consumers, this is the flipside of what renters are suffering. So maybe rent inflation falls while health insurance inflation rises quickly.

Again, we're in a position of using competing narratives to make predictions instead of simply looking at the overall inflation rate, and counting some categories as "core" while ignoring other categories. Very Arthur Burns like.

I think figuring out how to accurately price housing costs in real time is the answer. Along with all other expense categories.  Zillow home values would be a starting point. Then throw more money, tech, and research into dialing it in. These are potentially trillion dollar decisions that the fed is trying to make after all.  Also I think rent is a poor index, just use the underlying actual costs like home prices, insurance cost, repair services, etc. Because rent costs indirectly include interest rates, which is the variable they are trying to manipulate.  It's like measuring car costs by including interest rates. Of course car costs are going to increase just like home costs are going to increase if you include interest expense. If my home value doesn't increase but my mortgage and or rent increases because interest rates triple then that doesn't indicate inflation, it indicates that the fed is increasing interest rates.

[MustacheAndaHalf]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

[wageslave23]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

[MustacheAndaHalf]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

Conflating my theory with the Fed's goal means you do not understand my theory.  Where has the Fed said they want a "temporary surge in demand"?  I think you read half my theory and decided you understood it, but if you ignored my mention of a "temporary surge in demand", you did not understand my point at all.

[wageslave23]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

Conflating my theory with the Fed's goal means you do not understand my theory.  Where has the Fed said they want a "temporary surge in demand"?  I think you read half my theory and decided you understood it, but if you ignored my mention of a "temporary surge in demand", you did not understand my point at all.

Good point. And I agree there will be pent up demand for certain things especially necessities that can only be put off for so long like cars.

[EscapeVelocity2020]

A couple of interesting points I heard on NPR about the possible (inevitable?) government shutdown...  each week of shutdown will cost roughly 1/10% of GDP.  Also, if it goes on long enough, the Fed will be flying blind since data collection will be disrupted.  I can't even remember exactly why Congress can't agree on a budget or what concessions they are holding out for, just that McCarthy can't get the Republicans to compromise.

[SilentC]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

Conflating my theory with the Fed's goal means you do not understand my theory.  Where has the Fed said they want a "temporary surge in demand"?  I think you read half my theory and decided you understood it, but if you ignored my mention of a "temporary surge in demand", you did not understand my point at all.

Good point. And I agree there will be pent up demand for certain things especially necessities that can only be put off for so long like cars.

Don’t forget the economies in China and Europe are not so hot right now.  If they go from “bad” to “ok” that can cause inflation.  Even if they don’t make or consume the cars or goods we make here the plastics coatings wires etc. are universal.  More to your point Powell understands the pent up demand and wants it to stay pent up for a long time and slowly released or maybe evaporated.  Our car park could be older for example and it would be if we didn’t have a decade of zirp.

[ChpBstrd]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

Conflating my theory with the Fed's goal means you do not understand my theory.  Where has the Fed said they want a "temporary surge in demand"?  I think you read half my theory and decided you understood it, but if you ignored my mention of a "temporary surge in demand", you did not understand my point at all.

Good point. And I agree there will be pent up demand for certain things especially necessities that can only be put off for so long like cars.

Don’t forget the economies in China and Europe are not so hot right now.  If they go from “bad” to “ok” that can cause inflation.  Even if they don’t make or consume the cars or goods we make here the plastics coatings wires etc. are universal.  More to your point Powell understands the pent up demand and wants it to stay pent up for a long time and slowly released or maybe evaporated.  Our car park could be older for example and it would be if we didn’t have a decade of zirp.

I believe we’re talking about inflation expectations and its effect on consumer behavior. If so, the hypothesis goes against standard economic theory, which says people/firms will pull ahead spending to escape expected price hikes. E.g. If you need a car in the next couple of years, and expect cars to cost 10% more next year than what you could pay today, then it makes sense to go ahead and buy today. Not only do you dodge the price hike, but you also get the utility of having a new car sooner.

Also, if a significant number of people were holding back on big purchases, that would be reflected in a higher personal savings rate. The PSR is low and falling.

Of course, reality can get in the way of economically optimal decision-making and I think this is what you’re saying too. If households are running out of money and credit because prices are climbing and real wages are falling, they can only postpone their next big discretionary purchase, even if it makes sense to buy now. This explanation is consistent with the low and falling PSR.

It also implies pent-up demand, but bear this in mind: Economists assume demand is infinite and only held back by incomes and productivity. Just because lots of consumers want a new car doesn’t mean they can all afford it.

[SilentC]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

Conflating my theory with the Fed's goal means you do not understand my theory.  Where has the Fed said they want a "temporary surge in demand"?  I think you read half my theory and decided you understood it, but if you ignored my mention of a "temporary surge in demand", you did not understand my point at all.

Good point. And I agree there will be pent up demand for certain things especially necessities that can only be put off for so long like cars.

Don’t forget the economies in China and Europe are not so hot right now.  If they go from “bad” to “ok” that can cause inflation.  Even if they don’t make or consume the cars or goods we make here the plastics coatings wires etc. are universal.  More to your point Powell understands the pent up demand and wants it to stay pent up for a long time and slowly released or maybe evaporated.  Our car park could be older for example and it would be if we didn’t have a decade of zirp.

I believe we’re talking about inflation expectations and its effect on consumer behavior. If so, the hypothesis goes against standard economic theory, which says people/firms will pull ahead spending to escape expected price hikes. E.g. If you need a car in the next couple of years, and expect cars to cost 10% more next year than what you could pay today, then it makes sense to go ahead and buy today. Not only do you dodge the price hike, but you also get the utility of having a new car sooner.

Also, if a significant number of people were holding back on big purchases, that would be reflected in a higher personal savings rate. The PSR is low and falling.

Of course, reality can get in the way of economically optimal decision-making and I think this is what you’re saying too. If households are running out of money and credit because prices are climbing and real wages are falling, they can only postpone their next big discretionary purchase, even if it makes sense to buy now. This explanation is consistent with the low and falling PSR.

It also implies pent-up demand, but bear this in mind: Economists assume demand is infinite and only held back by incomes and productivity. Just because lots of consumers want a new car doesn’t mean they can all afford it.

Exactly, I’m not sure classical theory works super well in a world where a lot of consumers buy everything on credit and then get told a story by the media and their peers that credit will get cheap again.

[EscapeVelocity2020]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

Conflating my theory with the Fed's goal means you do not understand my theory.  Where has the Fed said they want a "temporary surge in demand"?  I think you read half my theory and decided you understood it, but if you ignored my mention of a "temporary surge in demand", you did not understand my point at all.

Good point. And I agree there will be pent up demand for certain things especially necessities that can only be put off for so long like cars.

Don’t forget the economies in China and Europe are not so hot right now.  If they go from “bad” to “ok” that can cause inflation.  Even if they don’t make or consume the cars or goods we make here the plastics coatings wires etc. are universal.  More to your point Powell understands the pent up demand and wants it to stay pent up for a long time and slowly released or maybe evaporated.  Our car park could be older for example and it would be if we didn’t have a decade of zirp.

I believe we’re talking about inflation expectations and its effect on consumer behavior. If so, the hypothesis goes against standard economic theory, which says people/firms will pull ahead spending to escape expected price hikes. E.g. If you need a car in the next couple of years, and expect cars to cost 10% more next year than what you could pay today, then it makes sense to go ahead and buy today. Not only do you dodge the price hike, but you also get the utility of having a new car sooner.

Also, if a significant number of people were holding back on big purchases, that would be reflected in a higher personal savings rate. The PSR is low and falling.

Of course, reality can get in the way of economically optimal decision-making and I think this is what you’re saying too. If households are running out of money and credit because prices are climbing and real wages are falling, they can only postpone their next big discretionary purchase, even if it makes sense to buy now. This explanation is consistent with the low and falling PSR.

It also implies pent-up demand, but bear this in mind: Economists assume demand is infinite and only held back by incomes and productivity. Just because lots of consumers want a new car doesn’t mean they can all afford it.

Exactly, I’m not sure classical theory works super well in a world where a lot of consumers buy everything on credit and then get told a story by the media and their peers that credit will get cheap again.

I'm also used to hearing talk of the wealth effect when home prices rise (a la 2000's).  That might be more the case when home prices rise in isolation vs. the current inflation raises all boats scenario and now rates are up so HELOCs are less appetizing, but still has a psychological sentiment impact. 

[ChpBstrd]

On Twitter or financial news I recall a graph of price increases that showed a few major categories.

Car loans were up 2% (maybe 5% to 7%?)
Home mortgages were up 3% (from 4% to 7%)
Credit cards were up 4% (from 16% to 20%)
Personal loans, 8% higher (from 12% to 20%)

I have a theory that people are all making similar, rational decisions.  Car payments cost too much, so people put off buying a car.  When inflation falls and rates fall, people all decide they can afford a car.  That temporary surge in demand, from people delaying, then becomes inflation.  Same with mortgages and even large CC purchases.  If people put off purchases, and then all decide to make purchases at the same time, we could see falling then rising inflation.

So how would I translate this theory into something that can be proven or disproven?  I suppose the raw number of car purchases, or raw number of houses bought.  Some people may be trading down, and I'd want to separate that from people not buying anything - people who are waiting.

UPDATE: Total vehicle sales in 2022-2023 seem lower than pre-pandemic.  People do seem to be waiting for something, although 2023 was better than 2022.  The data points to pent up demand.  The question is if the demand will be satisfied slowly over years, or quickly (leading to inflation).
https://ycharts.com/indicators/us_total_vehicle_sales

Your "theory" is the whole point of why the fed is increasing interest rates. The higher the interest rates, the less demand for goods and services because they "cost" more. Once inflation is under control and the fed wants to stimulate buying, they lower the interest rates.

Conflating my theory with the Fed's goal means you do not understand my theory.  Where has the Fed said they want a "temporary surge in demand"?  I think you read half my theory and decided you understood it, but if you ignored my mention of a "temporary surge in demand", you did not understand my point at all.

Good point. And I agree there will be pent up demand for certain things especially necessities that can only be put off for so long like cars.

Don’t forget the economies in China and Europe are not so hot right now.  If they go from “bad” to “ok” that can cause inflation.  Even if they don’t make or consume the cars or goods we make here the plastics coatings wires etc. are universal.  More to your point Powell understands the pent up demand and wants it to stay pent up for a long time and slowly released or maybe evaporated.  Our car park could be older for example and it would be if we didn’t have a decade of zirp.

I believe we’re talking about inflation expectations and its effect on consumer behavior. If so, the hypothesis goes against standard economic theory, which says people/firms will pull ahead spending to escape expected price hikes. E.g. If you need a car in the next couple of years, and expect cars to cost 10% more next year than what you could pay today, then it makes sense to go ahead and buy today. Not only do you dodge the price hike, but you also get the utility of having a new car sooner.

Also, if a significant number of people were holding back on big purchases, that would be reflected in a higher personal savings rate. The PSR is low and falling.

Of course, reality can get in the way of economically optimal decision-making and I think this is what you’re saying too. If households are running out of money and credit because prices are climbing and real wages are falling, they can only postpone their next big discretionary purchase, even if it makes sense to buy now. This explanation is consistent with the low and falling PSR.

It also implies pent-up demand, but bear this in mind: Economists assume demand is infinite and only held back by incomes and productivity. Just because lots of consumers want a new car doesn’t mean they can all afford it.

Exactly, I’m not sure classical theory works super well in a world where a lot of consumers buy everything on credit and then get told a story by the media and their peers that credit will get cheap again.

I'm also used to hearing talk of the wealth effect when home prices rise (a la 2000's).  That might be more the case when home prices rise in isolation vs. the current inflation raises all boats scenario and now rates are up so HELOCs are less appetizing, but still has a psychological sentiment impact.

I think the 2 part case for a coming slowdown in consumer demand involves (1) people who just traded up to a very expensive house payment not having HELOCs available at cheap rates or equity to kick demand along for another year or two, and (2) an eventual loss of faith in the idea that mortgages will return to sub-4% levels and a realization by those who bet big that they are in financial peril.

So far investors and consumers alike seem 100% invested in the rapid rate cuts with soft landing scenario, despite having been wrong for over a year now. We're at a point where consumer behavior (spend like crazy, pull ahead purchases if possible) is at odds with what consumers would do if they thought either a big recession or higher rates for the foreseeable future were in the future (save like crazy, postpone purchases if possible). Home equity can disappear quickly.

Of course, consumers have limited power over their own behavior. Just as they can wish to buy a new car but not afford to, they may not have the option to save or time their purchases due to falling real wages. Also, ads and those goddamned Joneses can lead people to violate their own financial intentions.

[SilentC]

This has been thought provoking.  I wonder if there will be a mini-surge in demand if/when people realize rates are higher for longer and give up on the house/remodel/car the Joneses have that they’re were going to buy when rates fell and then just buy what they can with their 7%+ loan.

[MustacheAndaHalf]

The S&P 500 ($SPY) is up +12% YTD ... the equal weight S&P 500 ($RSP) is up zero YTD.  I guess that's why I don't hear claims of a broad based rally anymore.

Earlier I presented indirect data about consumers running out of savings.  Bloomberg took Fed data and made the case more clearly, classifying people by income.  Those lowest in income ran out of savings over a year ago, and those in the 40-80% range just ran out of savings.
https://twitter.com/DiMartinoBooth/status/1706336549070331922

One warning: when bearish investors share bearish data, there can be a feedback loop or echo chamber.  Maybe it helps others to remind them my bearishness isn't new information - I've been bearish for months.

[wageslave23]

Here is a bearish article.
https://www.msn.com/en-us/money/savingandinvesting/the-s-p-is-heading-below-3-000-basic-math-and-a-metric-beloved-by-famed-economist-robert-shiller-suggests-it/ar-AA1hiPSE?ocid=hpmsn&cvid=4a2364a665e1438180db7c37743e37cf&ei=15