Has the Fed Already Whipped Inflation?

To hear Jeremy Siegel tell it, the Federal Reserve has already won its fight over inflation and should start taking its foot off the monetary brakes.

“I think the Fed should be near the end of its tightening cycle,” the ubiquitous market prognosticator and Wharton School finance professor told CNBC last week. According to Siegel, current headline inflation may still be high, “but forward-looking inflation has really been stopped. And I think the Fed should really slow down the rate of hiking, and if we get a snapback in productivity that’ll put further downward pressure” on inflation.

Is he right, or is it just wishful thinking so stocks can resume their decade-long winning streak?

Right now the signals look mixed, based on the two most important and widely-followed economic reports issued last week.
According to the Commerce Department, second quarter GDP fell 0.9% at an annual rate, on top of the prior quarter’s 1.6% decline.

Until this year, the mainstream media would have immediately pounced on that as clear evidence that we are officially in a recession, following the traditional definition of a downturn as two back-to-back negative quarters. Now, however, with a feckless president poised to lead his party to an election Armageddon in November, we learn that the old standard simply doesn’t apply anymore, so we can’t use the dreaded “R” word.

Whether that’s pure bias or pure something else that also begins with a B, July’s robust jobs report, which showed the economy added a much higher than expected 528,000 jobs, does create some doubt whether we are in a recession or not, and if so, what the Fed plans to do about it.

Instead of viewing the jobs report as good news being bad news – i.e., the Fed will need to continue tightening to stifle economic growth—and sell stocks, the market instead went up on Friday and continued to rally on Monday morning. Is the recession – if there ever was one – now officially over, the inflation monster slain and no further need for the Fed to continue to raise interest rates? Continue reading "Has the Fed Already Whipped Inflation?"

Should We Prepare For An Aggressive U.S. Fed?

Traders expect the U.S. Fed to soften as Chairman Powell suggested they have reached a neutral rate with the last rate increase. The US stock markets started an upward trend after the last 75bp rate increase – expecting the U.S. Fed to move toward a more data-driven rate adjustment.

My research suggests the U.S. Federal Reserve has a much more difficult battle ahead related to inflation, global market concerns, and underlying global monetary function.

Simply put, global central banks have printed too much money over the past 7+ years, and the eventual unwinding of this excess capital may take aggressive controls to tame.

Real Estate Data Shows A Sudden Shift In Forward Expectations

The US housing market is one of the first things I look at in terms of consumer demand, home-building expectations, and overall confidence for consumers to engage in Big Ticket spending. Look at how the US Real Estate sector has changed over the past five years.

The data comparison chart below, originating from September 2017, shows how the US Real Estate sector went from moderately hot in late 2017 to early 2018; stalled from July 2018 to May 2019; then got super-heated in late 2019 as extremely low-interest rates drove buyers into a feeding frenzy.

As the COVID-19 virus initiated the US lockdowns in March/April 2020, you can see the buying frenzy ground to a halt. Between March 2020 and July 2020, Average Days On Market shot up from -8 to +17 (YoY) – showing people stopped buying homes. At this same time, home prices continued to rise, moving from +3.3% to +14% (YoY) by the end of 2020. Continue reading "Should We Prepare For An Aggressive U.S. Fed?"

Here's Another Crisis the Fed Can Fix

Now that the geniuses at the Federal Reserve are on their way to engineering a soft landing — taming inflation while avoiding a recession — maybe their next task should be trying to fix the U.S. retirement system.

For the past year or so I have been bombarded with phone calls, emails and regular junk mail to sign up for Medicare, and this past weekend I finally reached the American Holy Grail: Medicare eligibility. It used to be Social Security, but with medical insurance so outrageously expensive Medicare has become the ultimate goal. 

Over this time I've found out the difficulties of trying to maneuver through this vast labyrinth of government benefits. Let me tell you, it ain't easy, so prepare yourself when it’s your time. 

How the government ever came up with this plan, I’ll never know, unless its intention was to deliberately confuse the heck out of its oldest citizens and to create a whole industry to help people navigate it. In that it has succeeded.

The first thing you need to know is that Social Security and Medicare are joined at the hip, but not exactly. While you’re eligible for Social Security starting at 62, you have to wait until 65 before you can sign up for Medicare, which again, is the more important of the two, unless you’re lucky enough to have your medical insurance covered by someone else, like your employer. For the vast majority of everyone else, however, Medicare is a critical benefit.

Maybe Bernie Sanders’ idea of Medicare-for-all isn’t such a great idea, but at least the two should start at the same time, just to avoid confusion.

First there’s the question of when to start taking Social Security. While you can start taking benefits as early as 62, you don’t reach your “full” payout until later, depending upon when you were born. For those born in 1957, you reach “full” retirement age at 66 and 6 months; add another six months if you were born in subsequent years.

Now, don’t confuse “full” retirement age with your “maximum” Social Security benefit, which occurs when you turn 70.

Confused yet? I’m just getting warmed up.

Most of the advice you hear about when to start taking Social Security is that you should wait until you reach your “full” benefit or, better yet, your “maximum” benefit. That’s because benefits rise by about 8% a year between 62, when you’re eligible to collect, and beyond. And the difference is indeed meaningful. For example, if you start collecting when you’re 62, rather than 66 ½, your monthly benefit will be reduced by $725, or 27.5%. Now that’s every month for the rest of your life.

While it may indeed be more financial advantageous to wait for the bigger payout, the fact is lots of people can’t – they need the money now. In fact, about a third of eligible recipients start collecting as soon as they can, at 62.

Waiting to collect isn’t always the best advice. If you believe you have a short life expectancy, either because of your lifestyle, family medical history, or both, it may be wise to start collecting early.

You also need to consider the amount of money you will forgo by waiting until “full” or “maximum” retirement age – that’s a lot of monthly payments you’ll be missing. In fact, the breakeven point between the two occurs around age 78, so if you don’t think you’ll live to see that, it may be wise not to wait to start collecting.

Now let’s get back to Medicare, whose rules are just as complicated.

There are several parts to Medicare. Part A, which covers hospitalization, is free. Yes, you heard that right - FREE.

The most expensive medical expense you can probably face is spending a night in the hospital, which Medicare estimates costs an average $13,600. And yet that coverage is free. I kid you not.

Part B covers your doctor visits, but there is a fee for that, which comes directly out of your Social Security payment. You are automatically enrolled in both Part A and B when you start collecting Social Security (I told you they were joined at the hip).

Part D covers your medicines, but not all the drugs you take are covered by Medicare (neither are dentistry, eyecare, and hearing aids, i.e., the stuff you really need when you’re old). There’s a fee for this, too.

Which brings us to Medicare “supplemental” insurance and “advantage” plans, which sound the same but are completely different. You’ve probably heard about them on TV.

As the name implies, supplemental insurance — which you also have to pay extra for - picks up some of what Medicare doesn’t cover (see above).

Advantage plans, by contrast, largely take the place of Medicare, but their premiums and coverages range all over the place. In case you were wondering, Advantage plans are also known as Medicare Part C.

I failed to mention that Social Security and Medicare make up the lion’s share of the federal budget and run out of money every few years, at which time Congress has to “fix” them to make them appear solvent for a while, which usually means making them even more complicated.

So maybe the Fed is the right place to seek a solution. It seems to solve just about all our other financial problems.

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Are We Returning To Normal?

It may be time to start thinking that this recent bout of high inflation won’t really last as long as we thought.

Right now the outlook is starting to look fairly positive: Oil prices are coming down, the chip crisis seems to be over — the shortage has quickly turned into a glut — supply chain problems have eased.

At the same time, technology will continue to make things more efficient, just as it did before the Covid-19 lockdown, thus easing price pressures.

Retailers are overloaded with inventory and are already unloading it at steep discounts. And stores can only raise prices so much before consumers say no. Do I really need that $6 box of cereal? Probably not.

Does this mean the Federal Reserve won't need to be as aggressive in raising rates as we thought? Was the Fed - dare I say it — correct after all in believing that inflation was transitory, and the only thing they got wrong was how long that temporary period would be and how high inflation would rise?

Maybe it won't be as long as most everyone thinks. Like most things lately in the U.S. — climate, Covid, the economy — crises never turn out to be as bad as the panic-mongers would have us believe.

Indeed, consumers don’t appear as worried about inflation as most people think. Consumer confidence numbers have dropped sharply, it’s true, but retail sales have held up, witness the 1.0% rebound in June after falling 0.1% the prior month, according to last Friday’s report.

That’s mainly because we still have a robust job market and incomes continue to rise, maybe not at the same rate as inflation but not far behind. The economy added 372,000 jobs in June, down slightly from May’s gain of 384,000 but 100,000+ more than forecasts.

The unemployment rate remained near the 50-year low of 3.6% and about where it was before the pandemic. Most importantly, perhaps, average hourly earnings rose 5.1% in June from a year earlier, not far below the core inflation rate of 5.9%.

Does this mean we’re out of the inflationary woods that our monetary and fiscal authorities have largely created by flooding the economy with money when it wasn’t totally necessary? I wouldn’t go that far.

While income gains seem to be running only a little behind the rate of inflation, the same can’t be said for interest rates. On Friday the yield on the U.S. Treasury’s benchmark 10-year note had fallen below 3.0%. Can the Fed realistically get inflation down to its target rate of 2% if inflation is double that on long-term bond yields? It doesn’t seem possible.

However, it’s useful to note that other bellwether rates have risen closer to the rate of inflation, thanks to the threat/promise of more Fed rate hikes. Specifically, the average rate on a 30-year fixed-rate mortgage in June hit 5.52%, according to Freddie Mac, more than 200 basis points above where it stood at the beginning of the year.

That’s certainly not good news if you’re planning to finance the purchase of a house soon, but it does stand the possibility of removing some of the froth from the housing market — both purchases and rentals — that is keeping many young people from starting out on their own. Long term, that’s a good thing.

More than any other statistic, perhaps, housing costs were an area where the Fed proved woefully inept in measuring inflation over the past decade or so.

Ever since the global financial crisis of 2008, the Fed banged its collective head against the wall trying to raise the inflation rate to 2%, while all along inflation was running well above that, if only the Fed’s army of Ivy League-trained economists had paid attention to what was going on around them in home prices and rents.

So where does that leave us? Is the Fed going to stop tightening because inflation may appear to be under control? No, nor should it.

For the past 15 years or so, ever since the end of the global financial crisis in 2008, we’ve heard constant pleas (including from yours truly) that monetary policy needs to “normalize,” meaning to some traditional, pre-2008 level of interest rates. Alas, it never came to pass.

The post-crisis economic growth rate was never strong enough to persuade the Fed to ease monetary policy and raise interest rates significantly. Then we had the pandemic, which moved everything back to square one, with Fed policy going well beyond where it had ever gone before.

Now, with the economy still growing fairly strongly despite multiple obstacles — supply chain disruptions, war in Ukraine, inflation — that should give the Fed comfort to continue to raise rates and reduce its balance sheet without overly disrupting consumers, who continue to travel, eat at restaurants, and go to ballgames.

Let’s hope it doesn’t lose its nerve as it has multiple times before. That should be a boon to stocks, which could certainly use a lift.

It’s time to get back to normal.

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Energy, Stagflation, and the Fed with Kyle Bass

Kyle Bass, Founder and CIO, Hayman Capital Management, joins Melissa Francis, former CNBC, MSNBC, Fox Business, and FOX News anchor, to discuss oil, alternative energy and strategies to navigate a stagflation.

Kyle Bass on Magnifi by TIFIN

Watch the Full Interview at Magnifi by TIFIN

Melissa Francis
Welcome everyone. Today, we are here to talk about Magnifi by TIFIN, a marketplace where you can harness real-time proprietary data to help individual investors and financial advisors fund, compare, and buy investment products like stocks, ETFs, and mutual funds, and model portfolios, to grow and preserve your wealth. I'm Melissa Francis, I know a little bit about this subject matter. I'm a former CNBC, MSNBC, Fox Business, and Fox News anchor. There is probably no more important conversation during these volatile times right now than what drives the economy? Joining us today is hedge fund manager and founder of Hayman Capital Management, Kyle Bass.

Kyle, thank you so much for being here. These are really turbulent times, today alone we have just watched the market seesaw. Everybody was ready to, they were sick to their stomach through the whole weekend, waiting for today, but I'm glad to have you on today, because you've made some really key calls in the past during times like this. You made a great call in subprime, China. You've made a lot of great calls in energy. Overnight, as you know, oil hit a 14 year high. This morning, though, oil was trading off as Germany came out and said they are not prepared yet to halt Russian imports. Oil just got slapped on that, but who knows what's going to happen next? What's your take on all of it? Continue reading "Energy, Stagflation, and the Fed with Kyle Bass"