I think the issue markets are digesting is not so much inflation or deflation, or even about the direction of rates, but instead a stronger commitment to Fed balance sheet reduction. I think this is what is causing the dollar to move higher and gold go lower. We are discounting tighter liquidity. And that will lead to higher bond market volatility, which means the market needs to run at lower leverage. This has a bit of a cyclically deflationary bias to it; in the context of the secular political inflationary trend you highlight. But it is still happening and probably has more to run. Even the Kospi decline can be explained by it. It tells me to be wary of any crowds, which has been a core view for a while.
Related, Bessent made a speech earlier this week at the Economics Club of NY where he said some interesting things. He likes a strong dollar and does not believe it derails manufacturing competitiveness, (maybe he would say that) and he thinks Private Credit is an interesting innovation but is nothing other than regulatory arbitrage that also makes lending more pro-cyclical. Hence PE going lower, which is good.
looking at your conclusions, I agree that short term inflation will undershoot, if on declining oil prices at least, and the Fed will cut by year end. future inflation is very different and I wish it would be lower but I know it won't
Russell, what is the probability that the United States will encounter a debt trap, defined as a scenario in which the economic growth rate falls below the borrowing interest rate?
If such a scenario were to occur, an inevitable devaluation of the US dollar would likely follow.
Food inflation is by far the most difficult to model. So most commodities - supply is easy to model, and demand fluctuates... think iron ore. But with food, demand is constant, and supply varies - one week you expect a bumper crop, and then one freak storm, and it fails.
To answer your question - yes it will have an impact - but in any way I can easily model? No
I think the issue markets are digesting is not so much inflation or deflation, or even about the direction of rates, but instead a stronger commitment to Fed balance sheet reduction. I think this is what is causing the dollar to move higher and gold go lower. We are discounting tighter liquidity. And that will lead to higher bond market volatility, which means the market needs to run at lower leverage. This has a bit of a cyclically deflationary bias to it; in the context of the secular political inflationary trend you highlight. But it is still happening and probably has more to run. Even the Kospi decline can be explained by it. It tells me to be wary of any crowds, which has been a core view for a while.
Related, Bessent made a speech earlier this week at the Economics Club of NY where he said some interesting things. He likes a strong dollar and does not believe it derails manufacturing competitiveness, (maybe he would say that) and he thinks Private Credit is an interesting innovation but is nothing other than regulatory arbitrage that also makes lending more pro-cyclical. Hence PE going lower, which is good.
looking at your conclusions, I agree that short term inflation will undershoot, if on declining oil prices at least, and the Fed will cut by year end. future inflation is very different and I wish it would be lower but I know it won't
Thoughtful, as always.
Russell, what is the probability that the United States will encounter a debt trap, defined as a scenario in which the economic growth rate falls below the borrowing interest rate?
If such a scenario were to occur, an inevitable devaluation of the US dollar would likely follow.
Well with most of the world in a debt problem, you end up with currencies not doing much - but gold going higher....
Wrt food inflation do you think that a potential super el nino would have an impact?
Food inflation is by far the most difficult to model. So most commodities - supply is easy to model, and demand fluctuates... think iron ore. But with food, demand is constant, and supply varies - one week you expect a bumper crop, and then one freak storm, and it fails.
To answer your question - yes it will have an impact - but in any way I can easily model? No