Money Guide
Inflation Rates and Credit Rates. Also: Indicators, Weekly Agenda, News, Musings, Opportunities
In this issue: Nobel prize awarded for insights on bank’s importance, small reduction of US inflation rates, UK Financial Plan U-turn, Crypto winter, Bear market worries, Freight railroad strike risk, China geopolitics, 10% I-bonds, and thoughts on Inflation Rates and Credit Rates.
Note: Money Guide has switched entirely to english to provide a better experience for all of our readers.
Indicators
Previous update: October 9th, 2022
🟢 ▼ US Inflation: 8.20% (vs 8.30% Aug 2022)
🔴 ▲ US Funds Rate: 3.25% (vs 2.50% Jul 2022)
🔴 ▲ US 2Y T-Note (Yield): 4.50% (vs 4.34%)
🔴 ▲ US 10Y T-Note (Yield): 4.00% (vs 3.88%)
🔴 ▲ DXY index: 113.21 (+0.41% vs 112.75)
🔴 ▲ USDMXN: 20.06 (+0.15% vs 20.03)
🔴 ▲ MX Inflation: 8.76% (vs 8.70% Aug 2022)
🔴 ▲ MX Funds Rate: 9.25% (vs 8.50% Aug 2022)
⚪ ─ MX Cetes 364D (Yield): 10.64% (vs 10.64%)
🟢 ▲ DJIA: 29745.94 (+1.53% vs 29296.80)
🔴 ▼ S&P 500: 3583.50 (-1.52% vs 3638.70)
🔴 ▼ NDQ100: 10741.08 (-2.70% vs 11039.47)
🔴 ▼ RUT: 1688.31 (-0.81% vs 1702.15)
🟢 ▼ Brent Oil: 93.49 (-4.26% vs 97.65)
🟢 ▼ GSCI: 647.90 (-2.82% vs 666.72)
🟢 ▼ Gold: 1643.40 (-3.03% vs 1694.69)
🔴 ▼ BTC: 19070.62 (-1.81% vs 19421.49)
🔴 ▼ ETH: 1274.97 (-3.06% vs 1315.26)
Overall: 🔴 ▼
Weekly Agenda
Monday:
Tuesday: US ISM Services Business Activity report, China GDP report
Wednesday: US housing starts report, UK and Europe inflation reports
Thursday: US weekly jobless claims report, US existing home sales report
Friday: Japan inflation report
Q3 Earnings reports during the week
News
🟢 Nobel Prize in economics awarded to Ben Bernanke, Douglas Diamond and Philip Dybvig for work on financial crises | The three US economists were recognized by the Royal Swedish Academy of Sciences for their work in the early 1980s, which the institute said provided the foundation for our modern understanding of why banks are needed, their chief vulnerabilities and how their collapse can fuel financial meltdowns (link)
🔴 CPI report: Surging prices show the Fed must continue its tough battle against inflation | A key inflation report showed consumer prices came in hotter than expected in September, punishing Americans and giving license to the Federal Reserve to maintain its pace of historic rate hikes. On an annual basis, prices rose by 8.2% in September, a slower increase than the 8.3% rise seen in August, according to the Consumer Price Index, which measures the changes in prices for a basket of consumer goods and services. Economists had projected the pace of price increases would slow to 8.1% last month (link)
🔴 The Most Powerful Buyers in Treasuries Are All Bailing at Once | From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month (link)
🟢 Liz Truss was defeated by the bond market. Investors aren't satisfied yet | After a bruising three-week battle with bond markets, UK Prime Minister Liz Truss admitted defeat on Friday. She fired her finance minister and gutted her economic program by promising to reinstate a big tax hike on corporations (link)
🔴 Bitcoin becoming less volatile than stocks raises warning flag - BNN Bloomberg | Even though lower volatility is typically welcomed in the stock market, for instance, the combo could spell trouble for Bitcoin, where there tend to be plenty of speculators who enter the space purely for the thrill of the swings. The fear with the low-vol, low-volumes noxious mix is that such an environment could mean prices drop faster in the event of a selloff (link)
🔴 Crypto Hackers Set for Record Year After Looting Over $3 Billion | At least $718 million has been stolen so far in October alone, taking the gross tally for the year past $3 billion and putting 2022 on course to be a record for the total value hacked, according to blockchain specialist Chainalysis Inc (link)
🟢 CoinShares’ Twitter bot gives a ‘fair price’ on NFTs... or does it? | CoinShares has developed an experimental Twitter bot that aims that give users an idea of what an NFT may be worth through an algorithm (link)
🔴 World's largest academic endowment lost money for the first time since 2016 | Harvard University's endowment lost $2.3 billion in fiscal 2022, blaming the loss on both the global market downturn as well as the university's commitment to climate goals. During Harvard’s most recent fiscal year, which ended on June 30, HMC lost 1.8% on its investments, bringing the endowment’s total value down to $50.9 billion (link)
🔴 Apple in Focus for US Stocks Facing Brutal Earnings Season | Investors expect this earnings season to pummel stocks further and will watch Apple Inc. in particular as a bellwether of global economic conditions. More than 60% of the 724 respondents to the latest MLIV Pulse survey say this earnings season will push the S&P 500 Index lower (link)
🔴 The threat of a freight railroad strike is back, but not until next month | A union of railroad track maintenance workers has rejected a tentative agreement with the nation's freight carriers, renewing the threat that there could be a strike that shuts down this vital link in the nation's already struggling supply chain (link)
Musings
Xi Jinping’s Endgame: A China Prepared for Conflict With the US | He has unleashed an array of military, economic and political campaigns to brace the country for the possibility of confrontation (link)
China's Shot at Overtaking the US Economy Is at Stake in Xi's Next Term | At the once-every-five-year Communist Party congress this month, where President Xi Jinping is set to secure rule until at least 2027, policies on the table will help determine how quickly China surpasses the US economy, or whether it ever will (link)
Shutting Off Fed ‘Money Printer’ Leaves Bitcoiners Out of Sorts | One of the most popular crypto memes during the Covid pandemic was about how the Federal Reserve was “printing” an endless amount of dollars -- “money printer go brrr,” in Twitter parlance -- and how that enhanced the value of Bitcoin, which has a capped amount of tokens. Now the proverbial printer has been turned off, with the central bank raising rates and the price of the largest digital token crashing more than 50% this year, leaving the average investor caring little whether there is a finite amount of Bitcoin (link)
Opportunities
I Bonds: Last chance to lock in a nearly 10% return on your savings | Until the end of this month, you have a chance to lock in a 9.62% rate for six months, October through March, on up to $10,000 in savings, if you purchase a Series I savings bond from TreasuryDirect.gov (link)
Inflation Rates and Credit Rates
Most people are worried about inflation. According to the US Consumer Price Index (CPI) published last week, prices rose on (weighted) average 8.2% compared to a year ago. Most people would agree that reduced purchasing power is not something they desire.
However, inflation has been used as a design feature of modern economies and not as a bug or an undesired consequence:
Inflation encourages spending of money. If I knew my money would be more valuable a year from now, I would be reluctant to spend it. If I knew my money would be less valuable a year from now, I would be hard pressed to find some good use for it, either spending it or investing it.
Inflation increases employment. When money gets cheaper (by losing purchasing power), employers receive more money for their products, and are more prone to hiring more people, even of those salaries are lower on real purchasing terms.
Inflation helps the government to get funded with cheaper debt. When general prices rise, also the prices of bonds (debt) rise. Higher bond prices means the government can get $100 (or close to that) for each $100 of debt bonds that it sells, instead of less. If it gets less, it would still have to pay back $100 in full. It also means lower yields on those bonds ($100 only yields $1, instead of $98 yielding $1). And, in the long run, it makes it easier for the government to raise more cheap money (through taxes and other income) to pay back the old debts.
Right now, the US Federal Reserve is trying to fight inflation by using its most powerful tool: raising interest rates.
The Fed rises the Funds Rate, which is the rate at which banks lend money to each other. All other rates are dependent on that one, because each step adds additional interest until it gets to mortgages, credit card rates, commercial loans, etcetera
By raising rates, money becomes more expensive to borrow, and interest makes future money more valuable (as opposed to what happens on point number 1). The overall result is a reduction on the general economic activity, and the market forces that normally push prices higher (investing, development and supply/demand dynamics).
The consequences are somewhat obvious: unemployment (as explained by the Phillips Curve) and prices dropping (including commodities, products, services, bonds, stocks, and almost everything else).
When we say inflation is rising or falling compared to last month, that doesn’t necessarily translate to prices rising or falling in absolute terms compared to last month. That means the rate of increase or decrease is higher or lower. A car can slow down, but it will still be moving forward unless it fully stops and goes back. There’s a difference between speed and acceleration and, most importantly, distance. Right now, most reports give us a sense of the speed or the acceleration of prices:
If the CPI in August 2022 was 8.3% (Year on Year) it implies $100 of chocolate from August 2021 were worth $108.30 in August 2022.
If the CPI in September 2022 was 8.3% (Year on Year) it implies $100 of chocolate from September 2021 were worth $108.2 in September 2022.
That inflation reading could also imply that prices rose from August 2021 to September 2021 roughly by 0.65% so that $100 of chocolate became $100.65 in September 2021 and then became $108.90 in September 2022.
There was almost no real inflation in the US in the previous decade. The Fed has raised rates to 4% (and will probably raise more) to reduce current inflation, trying to achieve an average 2% inflation target for the long term.
There is no probable scenario of deflation, and prices going back to where they were, except for products that are valued according to discounted future flows, like financial ones, and those that depend on very sensible supply and demand dynamics. Thinking that the economy will go back to where it was is illusory, but what’s important is for the economy to arrive at a position where its functioning resembles how it used to work during a better previous stage.
The Fed reported these projections during their september 2022 FOMC meeting:
There are US Government inflation protected bonds that can be compared to other US Government bonds to derive the inflation expectations of the bond markets. The current 10-year Breakeven inflation rate is 2.41% annually (compounded).
If inflation gradually slows towards 2%, with a 10-year compounded 2.41% rate, it could look something like this:
The Fed also shared projections for the Target Rates:
We can combine those assesments concerning inflation rates and credit rates to evaluate our current situation and, maybe, a future forecast:
Plan accordingly.
take care, have fun, be chill
-SM
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