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U.S. Inflation Accelerates to 40-Year High

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Re: U.S. Inflation Accelerates to 40-Year High

#101

Post by RC_ITR »

recursivedoubts wrote: post #7

We are in a tough spot. The Fed has held interest rates at 0 (negative, real terms) which makes all cash flows effectively infinite net present value. When rates are this low, small perturbations can be catastrophic for the NPV of, well, pretty much everything. I expect a lot of chaos with the economy whipping between inflation and deflation over the next few years as the Fed tries to ride the tiger. It's a good reas…

Wait wait wait.

>I expect a lot of chaos with the economy whipping between inflation and deflation over the next few years as the Fed tries to ride the tiger.

So you expect inflation to remain @ the 2-ish percent target but with extreme volatility?

It's an interesting theory, why do you think that?

Re: U.S. Inflation Accelerates to 40-Year High

#102

Post by titzer »

ck2 wrote: post #88
eldavido wrote: post #27

Earlier quoted context omitted.

> a good reason to never let rates get this low in the first place My brother-in-law remarked that "the fed is overdue to raise rates". My reply: asset prices don't matter to ordinary people. You already know this, but the Fed's mandate is "price stability and full employment". Full employment is going great -- the job market is tight, low-end labor is seeing lots of wage growth, everyone who wants a job is getting o…

Rents are 18-21% higher now as leases expire. It's massive, some people more than $100 per month increase. The waves of homelessness and people living out of their cars starts in a few months. https://www.apartmentlist.com/research/metro-rent-changes-18...

Some places are ahead of the curve. Los Angeles is already not looking good in terms of homelessness.

Re: U.S. Inflation Accelerates to 40-Year High

#103

Post by dmw1 »

djrogers wrote: post #58
eldavido wrote: post #27

Earlier quoted context omitted.

> a good reason to never let rates get this low in the first place My brother-in-law remarked that "the fed is overdue to raise rates". My reply: asset prices don't matter to ordinary people. You already know this, but the Fed's mandate is "price stability and full employment". Full employment is going great -- the job market is tight, low-end labor is seeing lots of wage growth, everyone who wants a job is getting o…

> What does matter is ... (rental affordability) Rental affordability is 100% correlated to asset pricing.

To a degree but it has an upper bound of income. Unless people are going to start taking on mortgages to pay their rent.

Re: U.S. Inflation Accelerates to 40-Year High

#105

Post by sokoloff »

legitster wrote: post #22

On one hand, after decades of inflation being too low, it's nice to see that the spigot works still. But it's bizarre that interest rates are being held so low. It's unclear who it's supposed to help. I get that we need to boost the Covid economy, but if feels like the economy is currently running at every possible constraint - except for lack of money.

The Treasury pays over $0.5Trillion in interest every year against a total tax base of around $3.75T. Doubling the interest rate would be directly harmful to the government’s financial position. (They could of course “print” more, but at some point that’s adding to the problem more than alleviating it.)

https://www.treasurydirect.gov/govt/reports/ir/ir_expense.ht...

Re: U.S. Inflation Accelerates to 40-Year High

#106

Post by RC_ITR »

dcolkitt wrote: post #63
recursivedoubts wrote: post #7

We are in a tough spot. The Fed has held interest rates at 0 (negative, real terms) which makes all cash flows effectively infinite net present value. When rates are this low, small perturbations can be catastrophic for the NPV of, well, pretty much everything. I expect a lot of chaos with the economy whipping between inflation and deflation over the next few years as the Fed tries to ride the tiger. It's a good reas…

> The Fed has held interest rates at 0 (negative, real terms) which makes all cash flows effectively infinite net present value. This is only true for cash flows discounted by the risk-free rate. The discount rate of risk assets comes from the risk-free rate with a risk premium added on top (probably 6% or so today for the average blue chip equity).

Yeah, I mean, talk to any stock-picking hedge fund and ask them how much the 10Y treasury yield factors into their discount rate (I'd say not a single one would say it does at all).

Classic HN 'Confidence = knowledge' comment.

Re: U.S. Inflation Accelerates to 40-Year High

#107

Post by maerF0x0 »

djrogers wrote: post #58
eldavido wrote: post #27

Earlier quoted context omitted.

> a good reason to never let rates get this low in the first place My brother-in-law remarked that "the fed is overdue to raise rates". My reply: asset prices don't matter to ordinary people. You already know this, but the Fed's mandate is "price stability and full employment". Full employment is going great -- the job market is tight, low-end labor is seeing lots of wage growth, everyone who wants a job is getting o…

> What does matter is ... (rental affordability) Rental affordability is 100% correlated to asset pricing.

Of course rental affordability is not tied to asset pricing.

Simply put it's tied to opex + cost of capital. And is opportunity costed against other investments -- but keep in mind real estate has high exit costs (realtor). So you'd have to think you can do much better on another investment to sell (and drive the asset price down) for it to make any sense.

The insight is that the cost of capital is roughly fixed at the time of purchase. If someone bought a place in 1970 they can price bid down to nearly nothing because that's their operating cost and the purchase price is only a fraction of landlords who bought recently.

Supply and demand create the conditions where landlords either compete on price, choose to sell, or potentially declare bankruptcy.

Re: U.S. Inflation Accelerates to 40-Year High

#108

Post by voisin »

danielmarkbruce wrote: post #76
recursivedoubts wrote: post #7

We are in a tough spot. The Fed has held interest rates at 0 (negative, real terms) which makes all cash flows effectively infinite net present value. When rates are this low, small perturbations can be catastrophic for the NPV of, well, pretty much everything. I expect a lot of chaos with the economy whipping between inflation and deflation over the next few years as the Fed tries to ride the tiger. It's a good reas…

This isn't right. The fed basically controls the very short end of the curve. The 30 year rate is above 2 (it briefly touched around 1.3 or something during the start of the covid panic). No one is/was discounting cashflows 10 years into the future at 0 so "all cash flows" didn't have infinite net present value.

Still, 2% over 30 years when inflation is running at 7%+ is negative in real terms. So maybe not infinite, but the key point is that investors are rewarded for holding effectively anything when real rates are negative.

Re: U.S. Inflation Accelerates to 40-Year High

#110

Post by jesusthatsgreat »

JaimeThompson wrote: post #90

I would think that the impact of rising prices would be reflected in reduced profits but it seems like most of the major companies are reporting rather large profits. Could it be some of the inflation is simply companies taking advantage to raise prices not because they need to but simply because they can?

Absolutely. If cost of goods goes up 7.8%, most companies will round prices up by 10%. Increased costs is a great excuse to not only pass costs on to the consumer, but sneak in some additional "while we're at it" price rises too.
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