“Everything should be made as simple as possible, but no simpler.”
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The Fed and Inflation
- Thread starter Spaghetti Code
- Start date
I'm trying to piece together why the fed is pumping $80B a month into the economy, and came up with a simple theory, which I would like you to poke holes in.
- The Dual Mandate of the Fed is to keep prices steady and maximize employment.
- As long as these are accomplished, any other side effects are fair game
- The Fed says they notice a lot of "anti-inflationary" forces, so printing money combats this
- Inflation can (in a very simplified view) be looked at through CPI
- CPI is a weighted average of prices for things people buy
- Some things in the CPI, like Airline tickets, and gasoline prices, are artificially low due to governments making it difficult for people to travel and work
- As a result, CPI looks relatively flat.
- As soon as the world returns to normal, these values will suddenly rubber band back to high levels, and we will "see" high levels of inflation, and as a result, high interest rates.
I know this is obviously simpler than reality, but I am trying to fit the high level reason why the Fed might be pumping the stock market. In the case of point 2, if the Fed can pump as much cash, and turn a blind eye towards "inflation", they could theoretically favor the rich, without honestly measuring inflation. For point 8, the deflation in some commodities is counterbalancing high inflation. Only on average does it look flat.
I feel like this narrative explains a lot of the astonishing behavior of the Fed, and predicts how the pumping will end. Thoughts?
CPI Breakdown: https://www.bls.gov/opub/ted/2021/consumer-price-index-2020-in-review.htm
Fed Balance sheet: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
The Fed creates (through digital ledger entries) bank reserves, which are NOT part of the money supply. The Fed has very few tools at its disposal, and money printing is not one of them. Also, the Fed looks at PCE to determine inflation, not CPI. CPI is more of interest to the government. Inflation and unemployment (Humphrey-Hawkins law in the 1970s) are secondary responsibilities of the Fed. The reason it was created was to prevent banks from succumbing to bank runs. It's there to protect the banking system.
Anyone who gives you an answer is lying to you. Could be next month or a couple of decades. Who knows. Just buy all the risk you can afford to stomach for the next few decades and ride the train. When the whole world wakes up to this reality it would be too late. A lot of people out there holding out for some type of value in prices which will never come in relative terms.
Economies and markets move in cycles. We can't time those cycles precisely, but we can approximately. We can see when we are early or late in the cycle, and this one is clearly on its last legs. All the signs are there. I can't say for sure this year or next year, but no way will it go on for 20 years without a crash. One sign of a market top is when people throw in the towel and say, "This could go on forever" or some other long period of time. No, it can't.
Economies and markets move in cycles. We can't time those cycles precisely, but we can approximately. We can see when we are early or late in the cycle, and this one is clearly on its last legs. All the signs are there. I can't say for sure this year or next year, but no way will it go on for 20 years without a crash. One sign of a market top is when people throw in the towel and say, "This could go on forever" or some other long period of time. No, it can't.
Last leg? This isn't even parabolic yet. Can it last forever? Certainly not but it will last for as long as the fed has control and all indications are that they will throw a lot more money at this before it's all over. I wouldn't be surprised to see their balance sheet hit 20-30T over the next 10-15 years. Where do you think that money will end up? Yep - Stocks and RE. Valuations don't matter when the alternative is currency debasement. Yes, i know how that sounds but it is what it is.
There will be a crash one day but it will be from levels quite a bit higher and the fed will not be able to stop it. Until then all selloffs will be quick and the recoveries to new highs even quicker. A lot of people's lives will be ruined when this is all over but owning assets will cushion the blow considerably, regardless of what the PE was when you bought.