Thomas Hoenig, Fed Reserve Dissenter

I've never agreed with Hoenig's interpretations of the "allocative effect". IMO, the benefits to the poor of lower interest rates on the consumer end far outweigh the banks being flush with cash. The '79 crash was a great lesson for economists everywhere and the late 2000's reinforced that with another smaller more concentrated bubble via "demand pull" on a far smaller scale.

What asset classes are in a bubble right now? Residential real estate has bumped up significantly, but is it in a bubble? Commercial real estate feels very likely to crash hard if hybrid work takes hold long term...but what else?

Another important difference is that this inflationary cycle was not as much created as a result of multiple years of "demand pull" at the maturation of a cycle as it was via fiscal policy and short term supply chain disruptions. There's always one guy bucking the Fed. Kashkari picked up the mantle when Hoenig left.
 
ktm said:
I've never agreed with Hoenig's interpretations of the "allocative effect". IMO, the benefits to the poor of lower interest rates on the consumer end far outweigh the banks being flush with cash. The '79 crash was a great lesson for economists everywhere and the late 2000's reinforced that with another smaller more concentrated bubble via "demand pull" on a far smaller scale.

What asset classes are in a bubble right now? Residential real estate has bumped up significantly, but is it in a bubble? Commercial real estate feels very likely to crash hard if hybrid work takes hold long term...but what else?

Another important difference is that this inflationary cycle was not as much created as a result of multiple years of "demand pull" at the maturation of a cycle as it was via fiscal policy and short term supply chain disruptions. There's always one guy bucking the Fed. Kashkari picked up the mantle when Hoenig left.
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Depends how you define bubble. Let's use this:

An asset bubble occurs when the price of an asset, such as stocks, bonds, real estate, or commodities, rises at a rapid pace without underlying fundamentals, such as equally fast-rising demand, to justify the price spike.
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stocks have very simple fundamentals you can use: dividend yield. If you have a low dividend yield, and low earnings growth, then that would be a bubble. If you have a low dividend yield and high earnings growth, that would not be a bubble.

Real estate is not a bubble because:

1. Interest rates are low, and banks are still lending
2. They refuse to make more real estate!

Interest rates change the calculations for both of these. If the cost to service debt increases, then company earnings can decrease, real estate becomes less affordable and if prices do not adjust, they become bubbly.

That's why everyone is looking and hoping that Powell pulls a rabbit out of his ass and doesn't need to raise interest rates. Mark my words: they will not increase interest rates.
 
nooby_mcnoob said:
Depends how you define bubble. Let's use this:



stocks have very simple fundamentals you can use: dividend yield. If you have a low dividend yield, and low earnings growth, then that would be a bubble. If you have a low dividend yield and high earnings growth, that would not be a bubble.

Real estate is not a bubble because:

1. Interest rates are low, and banks are still lending
2. They refuse to make more real estate!

Interest rates change the calculations for both of these. If the cost to service debt increases, then company earnings can decrease, real estate becomes less affordable and if prices do not adjust, they become bubbly.

That's why everyone is looking and hoping that Powell pulls a rabbit out of his ass and doesn't need to raise interest rates. Mark my words: they will not increase interest rates.
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Hah! That would be incredible if you are right about him not raising rates. I can't see a path where he doesn't raise, but what do I know.
 
I can understand his concerns and his concerns are all valid but what I find is that he doesn't give enough context to his concerns and he doesn't look at the results of his concerns. Yes money-printing does create asset bubbles but in what context? If the Fed is printing money permanently at an accelerated pace to the point that the productivity is not able to catch up then yes, it does create asset bubbles and entrenched inflation but what if it's just printing money temporarily in a very short-term and specifically just to deal with a special situation? And when that situation is dealt with, productivity will go back up to match and even erase some of the effects of the money-printing especially with the money-printing stopping and at least slowing down? Is that going to cause that much long-term damage like what he worried would happen?

Yes the money-printing could enrich the larger institutions unequally? But so what? It's also enriching other institutions and individuals too? Less so, yes but enriching nevertheless? And what if those larger institutions also give back and reinvest these enrichments and further stimulate the economy in turn and create opportunities? Wouldn't that balance off some of the negative aspects of "enrichment" that they received? This reminds me of what Margaret Thatcher said in response to the Labour Party's criticism of her policy in one of the parliamentary sessions: "He would rather the poor were poorer provided the rich be less rich...and you don't create wealth and opportunities that way and you don't create democracy that way..."
Now I am not dismissing Hoenig's concern about the danger of increasing the wealth gap uncontrollably altogether but what would he rather have? Everybody at the same income level no matter what? That's of course is the extreme being practiced under communism but if you extend the concern further, eventually communism is what you get and we all saw what came out of that.

The truth of the matter is, yes all of his concerns are valid but what he doesn't realize is that we are also living in different times when a lot has changed where we are now lot more flexible as an economy and people to deal with all of the negative effects from the money-printing from his concerns. I mean all of his concerns about money-printing were all pretty much based on what happened back in the days before technology, before JIT inventory, globalization and even upcoming robotics where productivity was lot lower and the economy as a whole was lot more rigid in dealing with the aftermath of money-printing. So maybe this is why the reality is lot better than what he's predicted, at least so far.
 
ktm said:
Hah! That would be incredible if you are right about him not raising rates. I can't see a path where he doesn't raise, but what do I know.
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We are not going to have a recession as long as people get off their a$$'s and go back to work once the economy re-opens. There are OTC anti-covid pills available now so there is no excuse to keep everything closed and banned anymore.
 
RedDuke said:
The unwind will be epic we just need to make sure we can participate in it on profitable side.
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Let's assume there is an unwind and it will be epic and it will last for months, if not years.

Who cares about getting top tick on that? No one should (IMO) because you can always get in just as you could have on the upside.

The alternative is that the unwind is epic and doesn't last for months/years or the unwind is not epic.

There is literally no benefit trying to top tick. Simple logic.
 
nooby_mcnoob said:
Let's assume there is an unwind and it will be epic and it will last for months, if not years.

Who cares about getting top tick on that? No one should (IMO) because you can always get in just as you could have on the upside.

The alternative is that the unwind is epic and doesn't last for months/years or the unwind is not epic.

There is literally no benefit trying to top tick. Simple logic.
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no doubt. So far long is the only game in Town for equities. Our models just simply take advantage of both directions, commodities only.
 
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