Thread by @PauloMacro

A thread on where the US stands in its ongoing desire to learn Portuguese🧵

My bro @hkuppy has flagged an interesting development that I hadn’t fully appreciated in the context of #bigflip (hattip @INArteCarloDoss) until this weekend.

Namely, the US is now a 2-speed economy.
1/

First we have the financial economy that relies on interest rates - this economy is totally fuct. Here you have the recession in Wall Street, PE/VC/tech, hedge funds, CRE/office, even some housing/auto — basically anything that needs a rate. As rates go up it gets more fuct.
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Then there’s the real economy which is screaming out of control. Hand out stimmies, cull a few million from the workforce, and then layer on COLAs…that economy is the real world not the nominal world — and it is hot.
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Did you know the 2023 COLA that kicked in last month for social security and govt employees is 8.7%? That’s +$140/month for 70 million Americans. $1680 per year. That’s 5x (inflation adjusted) the 2009 one-time $250 to retirees which bumped 2Q09 GDP +0.5% according to Mauldin.
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JPow can only fight one of these two. Raising rates + QT targets the past decade’s asset inflation and the financial economy, but only hits the real economy if they can shock CEOs into serious layoffs - for that you need a true market crash.
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The problem is wages are screaming for the lower/middle folk and there is no immediate transmission to that guy, especially because most of his debt (housing, auto, student loan) is fixed. So his wages going up makes him flush and he has a propensity to buy stuff over services
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We could see rates at 10% and wages still going up. And what’s worse is wage increases, while crazy, are still negative real, so govts will want to step in and “help” with stimmies and garbage disaster ideas like this:
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https://twitter.com/govkathyhochul/status/1627043185611665409

You know who’s really good at “indexation” like the above example (price controls where every price is linked to CPI)? Places in LatAm. Like Argentina. This is INFLATION INERTIA: a feature of inflationary regimes everywhere after they allow the genie to get out of the bottle.
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Add to this an extremely polarized and dysfunctional political environment where politicians aren’t concerned about the country but instead in winning the next election at any cost (“we can fix it later”). This increases the risk of policy mistakes exponentially.
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This is why inflation will keep coming and going in waves. The Fed ultimately cannot fix this problem. Their ZIRP short-circuited the natural market reaction to the fiscal profligacy which the Fed had enabled - but the fiscal profligacy is now bipartisan.
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And if you look around at Congress there is no end in sight. Trump took deficits to extremes after 16 years of growing fiscal gaps. There is nobody to stand for fiscal rectitude anymore. The connection between the taxpayer and the national debt is completely untethered…
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…and so govts will just run the tab until the bond markets fully crowd out private investment.

And while this is happening, the peasants will feel flush, all while they gradually get poorer as their money buys less.

Inflationary recessions create monetary illusions.
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Parting thought: the Fed’s primary motivation is to avoid embarrassment- they only pivoted hawk in Dec21 when inflation was the #1 Gallup issue and politicians were calling. Now gas is sub $4 and nobody complains about inflation, so the Fed can slow-walk it.
13/

This suggests to me a window where the economy is screaming and the Fed falls behind the curve.

Inflation related trades should scream.
/FIN