Inflation is being propelled by deficits running 6 percent of GDP. Plus you have government spending in the low 20s as a percent of GDP - I don’t have the stomach to look at the latest figures - when historically it is high teens (17-18, as a percentage of GDP). That’s why you have inflation. That and a fed that stuck its head in the ground repeating “it’s transitory, it’s transitory.” Powell doesn’t want to be the next Arthur Burns so he will hold but in economic terms there are strong arguments for the Fed to go at least another half point higher, and zero arguments to cut. Plus the Fed doesn’t want more banks to fail like last spring. Want a fun and interesting read? Pull the annual reports for some of the large banks (and brokers like Schwab that have a bank) and look at the notes to the financial statements and compare ‘21 to ‘23 with respect to the reclassification of certain USTs from trading book to hold to maturity. Hold to maturity is a GAAP concept that allows these firms to avoid current marks to market on their bond inventory. If they had to take current marks, they would likely be insolvent from a balance sheet perspective, and the Fed keeps repo lending on these securities at par to prop up these banks. The Fed won’t raise again in part because it will likely create more stability issues for the banks. (How people who run a bank don’t understand that interest rate risk needs to be hedged is a discussion for another day.)
Now do I think we are in store for Great Depression 2? Not at all. But there are problems with the current trajectory and overall levels of our federal spending and resultant debt relative to GDP, and it will, at some point, manifest itself in a way that no one can foretell. The biggest thing in our favor is the Europeans are socialist and so while the Euro is stable there is little economic growth or dynamism there and that limits them to second fiddle. And no serious investor really trusts the transparency of the Chinese and the resulting stability there is questionable. For all our faults, we don’t hide them and they are plain to see. And thank the good Lord in Heaven that we still have people here, a slim majority, but a majority nonetheless, that understand that handing out free stuff to otherwise healthy people is pointless and wasteful. We have 60 years of the great society to thank for a lot of this nonsense. As an aside, as awful and morally wrong as segregation was, it did not break the black family. But you know what broke the black family, and has now spread to other groups as well? Welfare and giving out free stuff.
But back to investing, all of this is another reason to simply stay well diversified and keep costs low, as an inflation hedge, and keep taxes low for the same reason. Everything else is talking heads on tv trying to sound smarter than they are. Have a good day everyone.
Kind of person? Yet they may think differently because we have our boat still and Harley and always running around doing things.
