The 2020's: A decade of Inflation

[Behappyalways]

We are probably at an early stage of a recession so don't really feel the effects... Next year will be a hard time...with recession and inflation. US unemployment presently is 3.5%. Some are predicting 7% unemployment based on housing data( a lot of jobs are related to the housing sector)...I keep an open mind on the 7% unemployment

Anyway last but not least....if that happens...

https://mobile.twitter.com/wallstmemes/s...5765861378

[weijian]

While certain areas like commodities are more sensitive to interest rates, I reckon other structural issues like reverse of globalization, a shrinking workforce and well-protected housing balance sheet will continue to prevent us from returning to the previous era of low inflation/low rates.

Federal Reserve’s Powell says December rate-hike slowdown possible, inflation war far from over

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in a speech to the Brookings Institution think tank in Washington.

He said curing inflation “will require holding policy at a restrictive level for some time,” a comment that appeared to lean against market expectations the US central bank could begin cutting rates next year as the economy slows.

https://www.businesstimes.com.sg/interna...on-war-far

[CY09]

I anticipate the Fed is looking at risk free rates to be at 5.00%-5.25% with QT running at 90 billion per month.

However, this will prolong inflation for a year. After yesterday's news, the US Dollar index fell by 1%. This means to the US consumers, about 1% of inflation is added via imported inflation. Secondly, the higher interest rates is resulting in higher rental cost in USA with residential and office rents increasing. For this, I expect another 2% increase in rents for US populace. With such a backdrop next year, I do not expect inflation to move below 4% next year, which means Jerome Powell will still be in a war mode for the entire 2023.

Truthfully, inflation can be solved by keeping rates at 3.75%-4.00%. The combination can be of 3.75%-4.00% with a QT of $190 billion per month (about $20 Billion equates to 0.25%). QT has a secondary effect of appreciating the US dollar as this is how QT works. Appreciating US dollar helps to buffer against imported inflation.

However, a larger QT means banks and tech companies will have less liquidity to make profits from via issuing more loans or having more loans to survive. Due to the high liquidity in USA, Apple funds its US operations by constantly raising bonds while keeping its cash abroad which has higher returns and avoiding the taxes for bringing the cash into USA. For those who have a significant percentage in bank/tech stocks, they would be much poorer. Who owns such stocks? They tend to be the higher income households of USA such as Federal Reserve Board members.

[Dosser]

   
The Singapore yield curve has been largely inverted for some time but is now even more extreme, with 1 month at 4.819% but 30 year at 2.731%:

http://www.worldgovernmentbonds.com/coun...e_vignette

Almost all of the yields from 5 year out are less than 3% and have been falling over the last month. The bond market seems to be signaling a severe recession and consequent fall in long term inflation expectations.

Personally, I am happy to scoop up short term bonds at yields that haven't been seen in Singapore for many years. Otherwise I largely sit on the sidelines waiting to see what happens. I wish that I bought more gold mining stocks than I did, while aware that this sector is always a wild ride and the current recovery could go into reverse in a heartbeat.

[CY09]

Due to the presence of a large amount of CPF OA slushing around in our Singapore system and its ability to bid for Singapore 6 months and 1 year bonds, it is likely it will trend towards 3.4%. *T bills which are 3.4% rates is better than putting in CPF OA.

At the end state, it is likely our yield curve are going to be flat line as information symmetry happens with people knowing the cut off rate of when T bills are better than CPF OA.

For all valuebuddies who are Singaporeans and PR, a reminder that the Decemeber T bills tranche is out. The magic number for T bills to be worth more than CPF OA is 3.4%. So remember to move your money from CPF OA into T bills to make it work better

[¯|_(ツ)_/¯]

@cy

Shashi Kumar wrote on "DOLLARS and SENSE" that due to the fees, and also the 2 month "loss" CPF interest (one month out, and one month in), there is only a gain of $35.70 at 3.77% TBILL interest rate for every $10k.

https://dollarsandsense.sg/every-singapo...ds-t-bill/

If the OA is still available for buy stocks, may be should spend time in finding the right stocks and buy them would be more rewarding?

Gratitude.

[Dosser]

@cy

Shashi Kumar wrote on "DOLLARS and SENSE" that due to the fees, and also the 2 month "loss" CPF interest (one month out, and one month in), there is only a gain of $35.70 at 3.77% TBILL interest rate for every $10k.

https://dollarsandsense.sg/every-singapo...ds-t-bill/

That is interesting as it shows the additional costs involved in using CPF funds to buy T-Bills, compared with those of us using cash. It helps to judge the appropriate rate to bid with competitive bidding. I don't know how long this opportunity will last, but I am happy to use it to obtain returns on cash sitting on the sidelines.

[weijian]

If the OA is still available for buy stocks, may be should spend time in finding the right stocks and buy them would be more rewarding?

Gratitude.

According to prospect theory, people will overpay for a high probability of gain.

When using CPF OA, another way to think of it is that we are loaning the money at 2.5% interest rates, so the opportunity either needs to be (1) sure win (high probability of gain), or (2) high expected gain.

(2) is hard. So it is probably easier to fall back on (1) for most folks.

But yes, if one overcomes the hurdles for (2), then it is much more scalable and durable than (1).

[ghchua]

Hi weijian,

To beat inflation in the long term, the key is not to invest only in bonds. Unless you are talking about inflation-linked bonds, which T-Bills are obviously not.

To beat CPF OA interest rate in long term, a simple strategy is to simply invest in STI ETF if you dislike unit trusts due to higher costs and do not wish to do stock picking. STI ETF dividend yield itself already beat CPF OA interest rate.

I don't understand the hype in using CPF-OA funds to bid for T-bills. Yes, you might get a higher yield in the short term. But what about long term?

[CY09]

The hype over T bills and CPF OA (it is a confluence of factors of inflation, pushing interest rate and DBS reluctance to increase its 12 month FD rate, when other local banks are double its rate, which depresses the overall CPF OA rate)

It has created a national anamoly where for the same risk level, people are better off moving away from the "national social security system".

No doubt the T bill/CPF OA rate is unable to beat inflation, however, the hype over it is justified via the risk/reward angle. To many novice investors, STI ETF may indeed be a tool to use for beating inflation. But there is an element of price fluctuations. T bills is a bond that is secured by the government