Over the weekend I was listening to an interview from Jack Farley at Blockworks with Jim Bianco, when it hit me. I've heard this all before and even said it outload to people. Economics is Politics.
The reality is this…
The Fed has to raise interest rates.. 7.5% year of year inflation is to hot, it isn't "transitory" anymore. Some think we may see a peak around March or April. We could but there are still parts of the CPI that could remain sticky or even keep going higher.
I'll be publishing a more in-depth article about the recent changes to how the CPI is calculated. Cooking the books is one way in deceiving the people from reality.
Regardless reality is here, voters feel the pain of inflation and aren't happy about it. Unknowingly they are demanding the government solve the very problem they have created.
Mid-term elections are coming later this year. Democrats are panicking about the likely red wave. Doubling down on failed policies is not a correct path forward. Shouting "TRANSITORY" from the rooftops doesn't make inflation go away. It only helps it become more entrenched and harder to get rid of.
The Fed is willing to let asset prices take a much needed haircut as rates rise. They know as well as anyone how overvalued markets are. Destroying some of the paper wealth they helped create for the 1% is worthy sacrifice. Can they stick to a soft landing though?
If March of 2020 is anything I would say no. An orderly decline could evaporate rather quickly.
Rates must rise at all costs, it is the only play in the playbook. History says every time the Fed hikes something eventually "breaks". We never know what until after the fact. The fact is rates will rise until something inevitably goes wrong..
Inflation will be fought until it cannot.
Things have changed over the past two years. Good or bad this is a post Covid world.
People have shifted from the office to the home. Our economy runs mostly on service type jobs that can be done 100% remotely from anywhere. Shifting out of the office was inevitable but Covid managed to bring that reality forward five or ten years. Reality coming forward is not something a lot of boomer CEOs are prepared to accept.
It is not a choice though, either allow people to work from home or pay them double the salary to return to the office. Without a change in attitude companies will continue to struggle to find workers. Jobs that require people to be on the job will also feel this competition. Companies will have to pay up in order to keep workers in the factory when they could land a job that allows them to stay home.
Airlines depend on the majority of their business coming from business travelers. This accounted for the majority of their profits pre-pandemic. Business class ain't cheep but if the company was paying for it why wouldn't they book the best.
Personal travel makes up for roughly 90% of travel now. I've been to the airport over the past two years. Since restrictions were lifted last summer people are out. They are traveling and spending but for leisure not business. Feels like coach it is, with the ticket being the cheapest part of the flight, which makes sense for most families.
People are spending tons more time at home. Spending habits have shifted with this. Demand for lumber was an early sign during the summer of 2020. If I'm going to be home a lot more well I'm going to make my home more desirable. Whether it be moving into a bigger more spacious house, renovating a current house or simply getting out of that studio apartment in the city.
These dynamics have caused shifts in demand. People are demanding stuff and tons of it! Stuff we get from overseas because we don't make anything here anymore. Supply chain issues and bottlenecks are the result.
These issues still have not resolved themselves.. Producers expect the economy to go back to its pre-Covid ways. In reality demand has shifted, old ways are not returning. People have evolved, desiring a different standard of life.
Producers not shifting supply due to changing demand has caused prices to rise. Prices that will continue to rise until the supply meets the demand.
Also until a couple trillion dollars are removed from the system.
The Fed has been buying 220 billion in assets for nearly two years. 120b every month of new securities to expand and 100b to match the securities which are maturing. QT is coming with assets rolling off and not being rebought, eliminating excess liquidity as a result.
Liquidity has been immense, insane asset valuations not seen since the dot com bust are a result.
The haircut is coming.. Hopefully the barber isn't completely doped up when he starts..
Politicans care about one thing, getting reelected. If fighting inflation means a better chance then its all hand on deck. Inflation will be fought! Consequences be damned.
Strap in for the mother of all rides.. It is hikes until something breaks.
Let's see how smooth these expectations can make a landing..