Lately it seems that we are always awaiting ‘news’—in particular inflation news. This week we have the personal consumption expenditures (PCE) data on Friday and just watching interest rates yesterday and this morning it appears that it is highly likely that rates will drift in the 4.15% to 4.30% area. Watching paint dry is kind of boring, but it is always fine with me as long as I am making money–really it is simply what we do.
Today we have durable goods orders being released at 7:30 a.m (central). It is unlikely that anything in this economic release will move markets. At 8 a.m. we have the Case Shiller housing price index–it will show prices continue to rise–no surprise to me. The supposed high mortgage interest rates are more and more being accepted by folks as the new norm–the ‘haves’ don’t worry as many, many are paying cash for new houses–the ‘have nots’ are simply screwed. Yes they may qualify for government backed loans–i.e. FHA, but my experience says that the more houses sold with FHA, VA and other government backed programs that occur the more likely we will see a housing event of some sort when/if a recession comes.
As everyone knows business development company Trinity Capital (TRIN) sold a new baby bond yesterday with a coupon of 7.875%–right in the area of other BDC baby bonds sold recently. The company may use some of the proceeds to redeem some of their 7% baby bond due 2025 (TRINL). I own some of the TRINL issue and thus lost a bit yesterday as the shares moved lower by 22 cents–no big deal. I own TRINL for the 7% coupon and for the stability of the share price being that short maturity issues will trade at $25 plus accrued and this has not changed. If they redeem some of the issue it will be on a pro rata basis that is ok–I can buy more shares if I desire.
Well equity prices are higher this morning–we’ll see if this holds up–no reason to think markets will tumble–all news is good news.
FYI
Affiliated Managers 2064 6.75% Note
Fido has a symbol for the new note, MGRE.
No trades or bid/ask listed as of 3.26.24 morning.
Thanks NWGG
MGRE is trading today at Fidelity 25.32 x 25.36
Thanks Maverick61
The Fed has already decided to abandon controlling inflation for the sake of maintaining economic growth. J. Powell went from a 2% target on inflation to inflation moving “towards” 2% so going from 4% “towards” 2% with “bumps in the road” and taking years to get there, if ever, is fine with JPOW. We already see economists justifying this approach and dismissing the possibility that inflation could get out of control.
The same people who failed to see rampant persistent inflation a couple of years ago with their “transitory inflation” are now going with “inflation moving towards” plan to justify rate cuts. Bottom line is markets will likely keep going up as the fed has clearly indicated its willingness to pump liquidity. The dollar should have weakened but all central banks are doing the same so other currencies don’t appreciate vs the dollar while the price of stuff will keep going up.
If this is the case (and I’m not sure it is) with a lower fed rate and consistent 3-4% inflation, then the bond vigilantes will push up longer-term rates to normalize the curve, market demand for treasuries will shift from short-term more towards these higher longer rates, and our projected long-term funding cost for the Federal debt will go up more, maybe a lot more.
This is pretty much the scenario going forward. Budget deficits for years to come but J Powell could resort to yield curve control so let’s see what rate on long end does.
Powell will be in a real pickel if inlation starts trending higher.
Went with my wife to the market today, happy to report inflation is no longer “trending higher”, it’s already here. The government estimates are what they are for many reasons and we will leave that there on this forum, but I am pretty sure most people know just comparing last years household expenses to this years, we are in reality closer to 7% inflation than we are 4% IMHO.
Question: Can anyone demonstrate that FFR at 5+% has done anything to bring down inflation? Or have high short rates contributed to inflation?
From reading Lyn Alden:
There are two ways money is created in the real economy: bank lending and deficit spending. Excess money creation by lenders + shortages take the blame for 1970s inflation. The correct monetary response is to raise short rates to slow lending.
1940s inflation was the result of deficit spending + shortages. The Fed didn’t raise short rates but imposed long-end yield curve control at 4%. Inflation ramped to 20% and fell back while government borrowing costs stayed modest. Eventually, the debt was inflated away and there was a post-war boom.
The current environment resembles the 1940s. You might even say this is a war-time economy. To me, the Fed has screwed up at every turn and is currently fighting fire with gasoline. Now, the Fed is under pressure to cut rates, inflation be damned as AJ pointed out. They need an excuse. Powell mentioned supporting employment…that’s a new twist after regularly saying the opposite.
Question: At this point how much does the FFR matter to the real economy? If it does, where specifically?
> Can anyone demonstrate that FFR at 5+% has done anything to bring down inflation?
Well that’s kind of the problem with macroeconomics generally: it’s incredibly difficult to compare against a control group. If there was some way to replicate the March 2024 USA economy but with fed funds at 2.00%, that’d be extremely useful, but…
> Question: At this point how much does the FFR matter to the real economy? If it does, where specifically?
Oh, it very much matters. Try financing *anything*. Even things that aren’t directly tied to short-term rates are indirectly tied to them.