Hot Inflation Numbers Will Resurrect 3/4% Rate Hike Talk

With year over year inflation at 8.6% you can be certain that talk of a need for a 3/4% hike in the Fed Funds rate will heat up and will likely temper talk about a rate pause in September. So much for reaching peak inflation earlier this year.

The 10 year treasury is now trading at 3.02%, down from 3.04% yesterday,which seems very muted, as the futures markets show stocks falling over 1%.

What does this mean to me in terms of investing my dry powder? Very little. I have plenty of dry powder and will continue to nibble a bit on a weekly basis—no hurry as we have plenty of time to deploy that dry powder. I continue to look for 6% or so in investment grade and over 7% in junkier issues..

26 thoughts on “Hot Inflation Numbers Will Resurrect 3/4% Rate Hike Talk”

  1. Cramer came out with some pretty scathing comments. When they lose him it’s a sign. I haven’t listened to him more then a combined 10 seconds since 2006-2007 but I saw the link….

    “Look, they just hate fossil fuels — and a lot of the numbers [they] talk about are not true…”

  2. David Rosenberg did some nifty math on twitter. (He had been the Chief economist for S&P in the past)

    When you strip out of the CPI all the items that are linked to energy (air fares, moving/freight, rental cars, delivery services, new and used vehicles), the core was +0.36% and the YoY steadied near 4%. The truth beneath the veneer.

    He (and I think) the inflation is a function of energy (and food) prices..

  3. As always: The United States of Amnesia. When people were falling all over themselves drinking in the hokum of the Green Energy Revolution which according to the pundits and politicians seemingly had no cost just like the fantasy of Modern Monetary Policy…no one bothered to consider what the cost of transitioning an economy that consumes 845 quadrillion BTUs of energy a year really entails.
    What we are experiencing now for a broader range of reasons is not even the tip of the tip of the iceberg of that transition.
    But I for one hope inflation continues to run rampant. I make much more money from higher yields and interest rates then I lose to the minor increases in my cost of living. Savers and small Investors have had to bare the entire brunt of every policy and regulatory mistake since 2008 and its about time that some of what was taken away from us is being returned.

  4. At this point, it does not do any good to assign blame for the current oil situation. A few points that are pertinent:

    1) People forget that oil literally traded at NEGATIVE ~$35/barrel back in 2020. So you literally had to pay someone to take YOUR oil. Nobody wanted the oil/gas that oil companies could provide, so guess what? They laid off a TON of production related people.

    2) Even if US oil companies wanted to rapidly expand production, it ain’t happenin. Not enough workers, special sand, water, pipelines, etc. Can’t turn on a dime.

    3) Oil industry execs are NOT going to go full throttle and even attempt to max out production. Two reasons: unfavorable politics and the inherent cyclical nature of the business. If every oil company went hog wild, you would just be counting the days until the next oil crash.

    4) In the meantime, everybody that is producing oil/gas, both in America, Russia and wherever is having record top lines sales and earnings.

    5) My personal highest probability is for high or higher oil/gas for the forseeable future. For many years we have held a small amount of oil/gas in our portfolios. It was dead money and we looked stupid. All of a sudden these are the 2022 winners having doubled or tripled. We ain’t sellin yet.

    6) Might have more insight shortly. Having a social event with some oil/gas executives this weekend.

    1. I think a more accurate statement would be 1/2% at the least.

      In other words, 1/2% probable, but 3/4 more probable than 0 or 1/4%..

  5. Libero – Oil prices are not up just because of the war in Ukraine. Look at any chart, they have been rising for the past year and a half due to government policy decisions that impact supply. But I think we are delving into politics which is discouraged so I am going to end it at that

    1. Politics as it relates to investments is on topic. Pushing a political agenda or bashing an opponent is what’s frowned upon. Prices are going up for a number of reasons, most people pick and choose those reasons which support their bias but as investors we don’t have that luxury. First rule of investing is don’t invest based on emotion.

  6. 8.6% !!!!

    Thank you, Sir. May I have another?

    This was s surprise for sure. I thought there would be a level off of the number but an increase, wow.

    So now the question is, does the Fed and government act rationally, or to they panic and make things worse?

    I’m moving money into position, this might be nice down draft to pick up some deals in the next month for sure. If the GDP shows a negative number next month, this could be a real mess.

    Stay safe, folks.

    1. Everything relies on oil, diesel and gas prices. Those prices go up, inflation goes up. It really is that simple.

      1. Todd–pretty much agree with this statement—it drives the economy no matter what some would like us to believe.

      2. The price of oil affects prices now but doesn’t have the same long term impact as expanding the money supply. One moves prices up and down, the other causes systemic Inflation.

    2. Government act rationally? LOL They are the idiots responsible for this mess

      All one can do as an investor is remain calm and work your plan. I usually stay near full invested (and I invest in a mix of preferreds and other dividend paying common stocks) but I have been building up cash the last several months anticipating this. I will just be patient and buy bargains when they appear

        1. The government can do a lot to reduce oil prices. They could remove the$10/barrel gas tax that was put in place under Obama. They could restart oil pipeline projects that were canned the first day Biden took office. They could give consumers and corporations gas tax credits to counter these higher prices (why not….they gave families thousands of dollars to fight Covid). The government could also approve drilling on 100% of Federal lands (instead of the 10% that Biden approved) AND remove the outlandish royalties that he put in place on this approval.

          These are only a few things…however, it is unlikely any of this will be done since our President does not want to upset his constituents who want the oil and gas industries gone.

          Bottom line, get oil prices down and inflation will go away.

          1. Spot on both Azure Blue and Chris. There is a lot the government has done that has caused the price of gas to more than double in the 1 1/2 years they have been in charge. And there is a lot they could do to remedy the situation – but they refuse because they have sold out to their anti-fossil fuel constituents. The middle class and poor be damned.

            It doesn’t impact me too much as I am retired and built up a very nice nest egg but I feel sorry for all those struggling to get by.

            On the investment front, I used to be big into oil and gas 15-20 years ago so I have strong knowledge of the oil patch. As I grew older though my investing approach changed. I still own some energy in my portfolio though and like Tex, after staying flat for many years (but still throwing off nice dividends), I have been loving the way these energy stocks have performed recently. And I don’t see anything on the horizon that will change that

            1. All the reasons: ESG driven by left wing, Covid resulting in oil capex destruction, Covid resulting in record monetary and fiscal stimulus, and Russia.
              Everything that could go wrong, basically went wrong. This is not all Biden’s fault, but its his job now to find a solution…

    3. The beatings will continue until the Government’s attitude toward hydrocarbons improves.
      JMO

      1. I definitely would like to see us drill our own oil but if I were to blame anyone for the high commodities right now, I’d blame Russia or the Saudi’s.

        1. Libero, you can’t do that, nor can you blame the person who made a deal with the Saudis in April 2020 to cut production. You also can’t blame the oil companies posting record refining profits. Don’t you understand how this works?

            1. No, you are supposed to blame someone you don’t like, regardless of what their actual influence is.

          1. Open ALL the US energy pipelines, suspend the federal tax on gasoline, create a comprehensive approach to the United States current and future energy needs, give no or low interest loans to build more refineries, give tax incentives to drill new oil/gas wells. This administration wouldn’t know how to run a proper economy if it bit them in the lip.

            1. Couldn’t agree with you more, Blue Guy. But “saving the planet” takes precedence here in DC (I live just across the river). No mercy for the shrinking middle class.
              Best revenge here, in addition to prudently acquiring preferreds, little by little, is to toss a few bucks into the (politically) toxic fossil fuel patch on days like today. As long as demand outstrips deliberately stifled domestic supply, the trend is your friend. This has worked for me, by and large, for at least 6 months and running. Except for today, of course!
              My opinion, BTW. Only time will tell.

          1. I agree Martin. What a waste of time reading these opinions. Only seasoned subject matter experts should be spouting sage guidance for the government. Otherwise it’s just silly backseat driving. Let’s stick to sharing verifiable facts in a way that helps everyone make more informed investment decisions.

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