Robert Lloyd, CFA
- Nov 25, 2022
Inflation Series: Part 5 Lending is INCREASING as rates rise
If the Fed was hoping higher interest rates would slow lending and economic growth, they are sadly mistaken. As we saw in the lead up to 2008, as rates increase, the incentive to lend increases because higher yields mean higher interest income. This implies that the money supply affected by credit expansion is increasing rapidly at the same time the Fed is trying to slow things down. In our view, credit market expansions are an important part of money supply and associated in
Robert Lloyd, CFA
- Nov 25, 2022
Inflation Series: Part 8 Demographics Are Now Inflationary
After decades of shifting labor-intensive factory jobs overseas, the United States finds itself in a new Cold War and a reversal of globalization. This is running into limits on the work force here in the United States. Not only is population growth low, but the percentage of the population willing to work has been in secular decline for decades. How to get more people to work? Higher wages will help, but that will hurt corporate margins which are at record highs. It is too e
Robert Lloyd, CFA
- Nov 25, 2022
Inflation Series: Part 7 Bank Regulations Contribution To Inflation
Before you claw your eyes out over the title, just look at all the innovation that happened in the 1960s and 1970s. (Table below) Not only were banks interested in lending money because rates were rising, but it was also EASIER to originate and move around credit exposure. This increased the speed of money moving around the economy, increasing the effective money supply. This is not happening today. The most recent pieces of bank legislation were tweaks to the 2010 Dodd-Frank
Robert Lloyd, CFA
- Nov 20, 2022
Inflation Series: Part 6 Consumer expectations of inflation are rising
Luckily for the Fed, consumer expectations for inflation are nowhere near the headline CPI numbers. That's the good news. The bad news is that inflation expectations are the highest in years and MAY be on a long-term upward slope. We won't know for sure until we get to the other side of 2023's recession. You see, inflation tends to fall in recessions. While the long-term trend in inflation might be higher, for the next few quarters it is likely to ease as growth slows down. T
Robert Lloyd, CFA
- Nov 20, 2022
Inflation Series: Part 5 Lending is INCREASING as rates rise
If the Fed was hoping higher interest rates would slow lending and economic growth, they are sadly mistaken. As we saw in the lead up to 2008, as rates increase, the incentive to lend increases because higher yields mean higher interest income. This implies that the money supply affected by credit expansion is increasing rapidly at the same time the Fed is trying to slow things down. In our view, credit market expansions are an important part of money supply and associated in
Robert Lloyd, CFA
- Nov 16, 2022
Inflation Series: Part 4 The bond market says the low inflation days are over
For most of the 1980-2020 period, interest rates have fallen. Sure, there were the occasional pullbacks in this trend, but overall rates have fallen and inflation has been quiet. No longer. Inflation is much higher than desired and the Fed has been dragging its feet to fix the problem. Naturally, the bond market gets a vote and the current vote is DOWN. Bond investors are voting with their feet and refusing to buy bonds unless the yield is higher. This is inflationary because
Robert Lloyd, CFA
- Nov 16, 2022
Inflation Series: Part 3 Government spending is inflationary
While the peak pandemic stimulus spending is ebbing, the level of government spending appears to be stabilizing at a new higher level. On an absolute level, government spending never seems to decline; it just rises at variable levels of steepness. On a relative basis compared to GDP, US Federal spending was ~20% of GDP prior to 2008, stabilizing at 22% after the financial crisis. Now it appears to be stabilizing at 24% of GDP after the pandemic crisis. Government spending is
Robert Lloyd, CFA
- Nov 14, 2022
Inflation Series Part 2: Monetary policy is inflationary
Monetary policy refers to whether the Federal Reserve is stimulating or constricting growth and inflation in the broad economy. While its policies are directed at the real economy, they significantly affect the financial economy or markets. This is because interest rates and quantitative easing policies directly affect leveraged or financed positions carried by Wall Street. While Interest rates are higher than last year, they are still significantly below inflation. Generally
Robert Lloyd, CFA
- Nov 14, 2022
Inflation Series Part 1: Factors affecting inflation, then and now
To survive 2023, you have to understand what is happening to inflation. Inflation dominates Fed policy today and Fed policy dominates the markets. Let's start by reviewing the key factors that affect inflation, because it isn't just Fed policy that drives inflation up and down. Here is our framework. We will address each factor over the next few days. The key takeaway is that except for bank regulation, the 2020's are starting to look a lot like the 1970s. If you'd like to di
Robert Lloyd, CFA
- Nov 4, 2022
Inflation is going to be a lot more sticky this cycle
Even though we think inflation will fall as we progress through the current recession, there are powerful inflation pressures in place that may prevent a return to the low-inflation era of the 2010s. • Demographics Baby boomers are retiring and adult participation in the workforce is continuing its multi-decade decline. Companies are scrambling to find workers and unlike previous recessions, workers are being retained (for now). • Debt Governments have enormous levels of debt