Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

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DB2
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by DB2 »

I really don't see with the amount of massive debt out there how increasing rates would be feasible. Can someone paint for a picture of how our economy could survive, say, 6% mortgage rates on a 30-year-fixed loan? Or large increases in credit card interest rates, corporate debt, state and federal debt (which is near WWII levels only we have no war). Individuals and corporates are pretty levered up. When the Fed tried to modestly increase rates and taper QE, the markets went nuts in the Q4 of 2018 forcing the Fed to change course. To me, it seems like this massive amount of debt has only been sustainable because of very low interest rates. Once rates go up, it's like a house of cards that falls. I have heard how inflation can inflate away some of this debt - but I am trying to picture it.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by watchnerd »

DB2 wrote: Mon May 17, 2021 11:17 am I really don't see with the amount of massive debt out there how increasing rates would be feasible. Can someone paint for a picture of how our economy could survive, say, 6% mortgage rates on a 30-year-fixed loan? Or large increases in credit card interest rates, corporate debt, state and federal debt (which is near WWII levels only we have no war). Individuals and corporates are pretty levered up. When the Fed tried to modestly increase rates and taper QE, the markets went nuts in the Q4 of 2018 forcing the Fed to change course. To me, it seems like this massive amount of debt has only been sustainable because of very low interest rates. Once rates go up, it's like a house of cards that falls. I have heard how inflation can inflate away some of this debt - but I am trying to picture it.
You wouldn't do it in one go.

You ramp it up slowly over time.

Only under duress would you "pull a Volcker".
Last edited by watchnerd on Mon May 17, 2021 11:28 am, edited 1 time in total.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Maverick3320 »

I'm just curious to hear what the Modern Monetary Theory crowd has to say about this. After all, inflation doesn't matter...right?
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by watchnerd »

Maverick3320 wrote: Mon May 17, 2021 11:26 am I'm just curious to hear what the Modern Monetary Theory crowd has to say about this. After all, inflation doesn't matter...right?
Say about what?

So far, we have asset inflation. Which is known and expected.

TBD if we have increased long term consumer inflation, as opposed to an anticipated transitory YoY uptick off recessionary prices.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by willthrill81 »

Maverick3320 wrote: Mon May 17, 2021 11:26 am I'm just curious to hear what the Modern Monetary Theory crowd has to say about this. After all, inflation doesn't matter...right?
No, that's not what MMT theory says at all, closer to the opposite actually. See this thread for an explanation.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Robot Monster »

"Key Inflation Gauge Overstating Prices, Harvard’s Cavallo Says" link

Capello details his take on this in a Twitter thread. link
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Tommy »

DB2 wrote: Mon May 17, 2021 11:17 am I really don't see with the amount of massive debt out there how increasing rates would be feasible. Can someone paint for a picture of how our economy could survive, say, 6% mortgage rates on a 30-year-fixed loan? Or large increases in credit card interest rates, corporate debt, state and federal debt (which is near WWII levels only we have no war). Individuals and corporates are pretty levered up. When the Fed tried to modestly increase rates and taper QE, the markets went nuts in the Q4 of 2018 forcing the Fed to change course. To me, it seems like this massive amount of debt has only been sustainable because of very low interest rates. Once rates go up, it's like a house of cards that falls. I have heard how inflation can inflate away some of this debt - but I am trying to picture it.
6% mortgage rates on a 30-year-fixed loan - I bought house in 2000 and rate was 8.3%. I survived.
Rates will go up - house prices will go down and became reasonable.
Credit card interest rates - who cares? I'm not using CC to finance purchase. At one point people should understand if you don't have money to buy something - you don't buying, not finance purchase with outrages rate.
Corporate debts? Let corporations use money to R&D or similar, not to new employee perks. Even layoff some people (in my mega corp at least 15% must be let go).
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Broken Man 1999 »

Some companies, including tech, not only survived, but prospered thoughout the pandemic.

Hard to say how things will turn out over the short timeframe, even harder to predict long term.

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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Northern Flicker »

FIREchief wrote: Sun May 16, 2021 1:57 am In threads such as this, when people start mentioning liquidity risk of TIPS it's a sign that somebody has ran out of ammo. :twisted:
To reach closure on the discussion about whether or not TIPS yields/prices are independent of future inflation expectations, can I now assume that you are not going to offer any analysis or cite any research that would controvert the Fed's research result that future inflation expectations contribute to TIPS yields/pricing?
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by FIREchief »

Northern Flicker wrote: Mon May 17, 2021 3:57 pm
FIREchief wrote: Sun May 16, 2021 1:57 am In threads such as this, when people start mentioning liquidity risk of TIPS it's a sign that somebody has ran out of ammo. :twisted:
To reach closure on the discussion about whether or not TIPS yields/prices are independent of future inflation expectations, can I now assume that you are not going to offer any analysis or cite any research that would controvert the Fed's research result that future inflation expectations contribute to TIPS yields/pricing?
Yes. 8-)
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by 9-5 Suited »

I predict there is a strong likelihood that in May 2024 this thread will be resurrected from the dead to show that no one knows much of anything about future inflation or interest rates.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by PowderDay9 »

Freefun wrote: Sun May 16, 2021 7:02 am
avenger wrote: Sat May 15, 2021 3:02 pm Maybe an unpopular opinion: I feel like click bait such as this should be locked in this forum.
I benefit from the healthy discussion in this thread.

If it’s the title that’s misleading then perhaps a suggestion to improve it (?)
”Inflation could be 6% a year for the next 3 years"

If the headline is not click bait then it's at least sensationalized. Whatever you want to call it, CNBC (and other media outlets) does this a lot. Making bold predictions about topics people are concerned about will drive clicks.

Also, when did we start projecting inflation in 3 year time periods? Why not a decade then? Inflation could be 35% in the next decade!
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by IMO »

Robot Monster wrote: Mon May 17, 2021 12:02 pm "Key Inflation Gauge Overstating Prices, Harvard’s Cavallo Says" link

Capello details his take on this in a Twitter thread. link
What's to say there isn't an understating of prices on categories? For example rent during the pandemic would likely make the CPI aspect for rent low given the significant number of individuals who had rent reduced or simply forgiven (is that the right word?) and apparently in large cities, rents had dropped from what I've heard/read.

From the bls.gov site: https://www.bls.gov/covid19/effects-of- ... -index.htm

"How does the CPI handle forgiveness, reduction, or nonpayment of rent in its shelter indexes?
To collect rent values, CPI data collectors identify respondents for each sampled housing unit when they are initiated into the sample. Respondents could include its occupant (the renter), its owner (the landlord), a property manager, or an authorized representative of the occupant. However, in a given month when the unit is priced, the data collector could attempt to contact more than one of these respondents to get data on a sampled housing unit. For example, if the occupant is unavailable, the property manager might be contacted.

Specifically, the respondent is asked:
1. How much rent (are you/is the tenant) paying for this (house/apartment) now?
2. What period of time does that rent cover?

Most often the answer to question 2 is 1 month, but occasionally rent might be for a different length of time, or rent for a part of a month may be prorated.

When an unusually large price change is reported by a respondent, the data collector typically attempts to investigate the situation and confirm the change. For instance, if a tenant reports a large decline, the data collector will attempt to confirm this with the landlord or property manager. Relevant to the COVID-19 pandemic, when a tenant reports being unable to pay rent, the data collector is instructed as follows (from the manual used by CPI data collectors):

Be sure to probe these situations to determine if any rent obligation will be forgiven.
If the landlord expects payment in full, regardless of when, enter the full rent amount that is due.
If some or all of the rent is being forgiven, enter the amount the landlord/manager has agreed to accept.
If the rent is not paid or not expected to be paid AND the landlord/manager is unsure about the future, enter $0.00.


These are all longstanding procedures, with the exception of the final bullet addressing situations of uncertainty, which have generally not arisen in the past.

Although some units in the rent sample, notably those under rent control, are excluded from owners’ equivalent rent calculation, a unit would not be excluded from the computation of owners' equivalent rent simply on the basis of a large decline in rent paid.


Note that a free or $0 price in the CPI is adjusted to a small positive value, typically a value equal to a 95-percent reduction from the previous price. (Prices of zero do not work well in the formulas used to compute the CPI.)
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Robot Monster »

9-5 Suited wrote: Mon May 17, 2021 7:13 pm I predict there is a strong likelihood that in May 2024 this thread will be resurrected from the dead to show that no one knows much of anything about future inflation or interest rates.
Yes, let's meet here again 5/24! I want to see how this resolves:

"At the heart of this debate is the conundrum, what's a bigger risk to markets right now - inflation running too hot or not hot enough to get out from under a mountain of debt & a history of slow growth? Many investors say the former. The Fed has indicated it's the latter." link
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by willthrill81 »

DB2 wrote: Mon May 17, 2021 11:17 am I really don't see with the amount of massive debt out there how increasing rates would be feasible. Can someone paint for a picture of how our economy could survive, say, 6% mortgage rates on a 30-year-fixed loan? Or large increases in credit card interest rates, corporate debt, state and federal debt (which is near WWII levels only we have no war). Individuals and corporates are pretty levered up. When the Fed tried to modestly increase rates and taper QE, the markets went nuts in the Q4 of 2018 forcing the Fed to change course. To me, it seems like this massive amount of debt has only been sustainable because of very low interest rates. Once rates go up, it's like a house of cards that falls. I have heard how inflation can inflate away some of this debt - but I am trying to picture it.
I share your thoughts. At all levels, our nation has gotten very accustomed to very cheap debt, and dramatically raising the cost of new debt could be exceptionally difficult, not the least of which being the reality that the Fed is certainly influenced by the politics involved.

It's one thing for someone to say that the Fed can just raise overnights rates to rein in inflation, but it's another matter entirely for the Fed to actually (1) raise rates sufficiently and (2) maintain those rates long enough to accomplish the goal. Regarding #2, I repeat that it took two years of Volcker raising rates before inflation started to go down. That was a painful time for many.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by DB2 »

willthrill81 wrote: Tue May 18, 2021 10:05 am
DB2 wrote: Mon May 17, 2021 11:17 am I really don't see with the amount of massive debt out there how increasing rates would be feasible. Can someone paint for a picture of how our economy could survive, say, 6% mortgage rates on a 30-year-fixed loan? Or large increases in credit card interest rates, corporate debt, state and federal debt (which is near WWII levels only we have no war). Individuals and corporates are pretty levered up. When the Fed tried to modestly increase rates and taper QE, the markets went nuts in the Q4 of 2018 forcing the Fed to change course. To me, it seems like this massive amount of debt has only been sustainable because of very low interest rates. Once rates go up, it's like a house of cards that falls. I have heard how inflation can inflate away some of this debt - but I am trying to picture it.
I share your thoughts. At all levels, our nation has gotten very accustomed to very cheap debt, and dramatically raising the cost of new debt could be exceptionally difficult, not the least of which being the reality that the Fed is certainly influenced by the politics involved.

It's one thing for someone to say that the Fed can just raise overnights rates to rein in inflation, but it's another matter entirely for the Fed to actually (1) raise rates sufficiently and (2) maintain those rates long enough to accomplish the goal. Regarding #2, I repeat that it took two years of Volcker raising rates before inflation started to go down. That was a painful time for many.
Agreed! Funny as I was going to reply about Volcker and those painful two years.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by IMO »

DB2 wrote: Tue May 18, 2021 10:20 am
willthrill81 wrote: Tue May 18, 2021 10:05 am
DB2 wrote: Mon May 17, 2021 11:17 am I really don't see with the amount of massive debt out there how increasing rates would be feasible. Can someone paint for a picture of how our economy could survive, say, 6% mortgage rates on a 30-year-fixed loan? Or large increases in credit card interest rates, corporate debt, state and federal debt (which is near WWII levels only we have no war). Individuals and corporates are pretty levered up. When the Fed tried to modestly increase rates and taper QE, the markets went nuts in the Q4 of 2018 forcing the Fed to change course. To me, it seems like this massive amount of debt has only been sustainable because of very low interest rates. Once rates go up, it's like a house of cards that falls. I have heard how inflation can inflate away some of this debt - but I am trying to picture it.
I share your thoughts. At all levels, our nation has gotten very accustomed to very cheap debt, and dramatically raising the cost of new debt could be exceptionally difficult, not the least of which being the reality that the Fed is certainly influenced by the politics involved.

It's one thing for someone to say that the Fed can just raise overnights rates to rein in inflation, but it's another matter entirely for the Fed to actually (1) raise rates sufficiently and (2) maintain those rates long enough to accomplish the goal. Regarding #2, I repeat that it took two years of Volcker raising rates before inflation started to go down. That was a painful time for many.
Agreed! Funny as I was going to reply about Volcker and those painful two years.
Appreciate the comments/thoughts on the topic. Personally had to look up what you were discussing with Volcker to put your comments in context. I suspect most are not familiar with Volcker, unless they studied economic history. Here's a good link to a short quick easy read on the topic: https://www.stlouisfed.org/publications ... ht-us-much

I think/suspect politics unfortunately has become more of an influence in the past due to all of the new communication technology that wasn't around at the time of Volcker.

A good example of this type of effect is the current decision to extend Federal unemployment benefits until September. Who personally hasn't seen the massive request for employers to fill massive numbers of jobs (https://www.marketwatch.com/story/u-s-j ... 1620742194) that is competing against the current Federal decision. Surely wage inflation for those jobs will result? Maybe that's the plan? It seems plausible that there will in fact be a factor in further inflation, much akin to how higher gas prices are a factor to drive higher inflation.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Oicuryy »

IMO wrote: Tue May 18, 2021 1:32 pm Appreciate the comments/thoughts on the topic. Personally had to look up what you were discussing with Volcker to put your comments in context. I suspect most are not familiar with Volcker, unless they studied economic history. Here's a good link to a short quick easy read on the topic: https://www.stlouisfed.org/publications ... ht-us-much
Here is another piece on the Fed's roll in the Great Inflation.
https://www.federalreservehistory.org/e ... -inflation

And here is a long article on Arthur Burns, the Fed chair during much of the '70s. It is worth a read for those interested in getting a better understanding the inflation of that era.
https://www.richmondfed.org/publication ... ter/hetzel

Fed officials are talking about maintaining an accommodative monetary policy until unemployment comes down. But I very much doubt the Fed will repeat the mistake it made fifty years ago.

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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by mrekvy491 »

He has been saying this for months, almost for a year.

Maybe around 6% inflation per year, value stock outperformance, quality stock and gold as the conservative asset in portfolios. The end of the 30+ years of bull market for bonds.

Don’t think it is that outrageous. One may buy some inflation linked bonds and value stocks, or international stocks as a hedge. I don’t worry about inflation that much as I have all world portfolio and work in Europe. I just am not buying nominal bonds at the moment.

But if you only hold S&P500 or NASDAQ following index, it could be better to diversify more.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by redmaw »

fatcoffeedrinker wrote: Sun May 16, 2021 3:08 pm
willthrill81 wrote: Sun May 16, 2021 2:36 pm
Northern Flicker wrote: Sun May 16, 2021 1:13 pm
willthrill81 wrote: Sun May 16, 2021 9:39 am
typical.investor wrote: Sun May 16, 2021 6:21 am In any case, 20% inflation suggests a perhaps 22% overnight rate.
I don't know that the current Fed has the wherewithal to raise the overnight rate to something like 8% if inflation rises to 6%.
It would not be a preconceived target, but the rate needed to tame the inflation, which likely is much lower than 8%. For one thing, they won't wait for inflation to hit 6% to start raising rates and tapping the brakes.
CPI is already at 4.2%. Has the Fed even started discussing the possibility of raising the overnight rate in response? If they have, I'm not aware of it.

Also, as I've already noted in this thread, during the Volcker era, it took two years of the Fed starting with a historically overnight rate and then raising it substantially before inflation started to shrink. The Fed's tools, while potentially effective, can be rather blunt and have significant lag.
But 4.2% is using early COVID at the lowest CPI reading as a starting point. Go back 15 months to current and annualize and you get 2.8%. Go back 18 months to current and annualize and you get 2.5%. Time will only tell what comes next, but I don't think one can look at 4.2% (at least not yet) and predict any trend.
Sure you have a low starting point, but that's only half the story. 2.8% inflation was unthinkable 2 years ago, so that is still a high number, which is almost entirely attributable to then last year. And let's be clear the 4.2% was .6% higher than expectations and those expectations knew the low starting point.(if you believe CNBC articles from the day that number hit). I think the point stands that it will take a while at 4+% inflation to convince the feds that the inflation is more than transitory and start doing something about it, at which point it will take some time to reign it back in. A few years of elevated inflation doesn't seem out of line.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by fatcoffeedrinker »

redmaw wrote: Wed May 19, 2021 7:53 am
fatcoffeedrinker wrote: Sun May 16, 2021 3:08 pm
willthrill81 wrote: Sun May 16, 2021 2:36 pm
Northern Flicker wrote: Sun May 16, 2021 1:13 pm
willthrill81 wrote: Sun May 16, 2021 9:39 am

I don't know that the current Fed has the wherewithal to raise the overnight rate to something like 8% if inflation rises to 6%.
It would not be a preconceived target, but the rate needed to tame the inflation, which likely is much lower than 8%. For one thing, they won't wait for inflation to hit 6% to start raising rates and tapping the brakes.
CPI is already at 4.2%. Has the Fed even started discussing the possibility of raising the overnight rate in response? If they have, I'm not aware of it.

Also, as I've already noted in this thread, during the Volcker era, it took two years of the Fed starting with a historically overnight rate and then raising it substantially before inflation started to shrink. The Fed's tools, while potentially effective, can be rather blunt and have significant lag.
But 4.2% is using early COVID at the lowest CPI reading as a starting point. Go back 15 months to current and annualize and you get 2.8%. Go back 18 months to current and annualize and you get 2.5%. Time will only tell what comes next, but I don't think one can look at 4.2% (at least not yet) and predict any trend.
Sure you have a low starting point, but that's only half the story. 2.8% inflation was unthinkable 2 years ago, so that is still a high number, which is almost entirely attributable to then last year. And let's be clear the 4.2% was .6% higher than expectations and those expectations knew the low starting point.(if you believe CNBC articles from the day that number hit). I think the point stands that it will take a while at 4+% inflation to convince the feds that the inflation is more than transitory and start doing something about it, at which point it will take some time to reign it back in. A few years of elevated inflation doesn't seem out of line.
I don't know why 2.8% would be unthinkable since the CPI-U had averaged 2.7% since the baseline was set to 100 in 1984.

That said, my point is that touting that CPI is already at 4.2% is somewhat misleading because the starting point was literally the trough during COVID, which makes a YOY number less useful. I'm guessing the fed understands that as well. For all of the reasons that we have had low inflation for the past few decades (globalization, technology advances, aging demo, etc.), those haven't changed. One would expect a short term spike given the recent monetary policies, so yes, inflation has increased from what it was 2 years ago. It's just not yet at 4.2% in my opinion, and we'll have to wait and see if the forces listed above that have kept it low for a few decades will again take over.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by retired@50 »

invest2bfree wrote: Sat May 15, 2021 10:57 am If this comes true we will see fixed income being crushed. Do we sell all your bonds?
I have no plans to sell all my bonds, unless of course I need the money, in which case, I'd probably only sell some of my bonds.

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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by steve r »

DB2 wrote: Mon May 17, 2021 11:17 am I really don't see with the amount of massive debt out there how increasing rates would be feasible. Can someone paint for a picture of how our economy could survive, say, 6% mortgage rates on a 30-year-fixed loan? Or large increases in credit card interest rates, corporate debt, state and federal debt (which is near WWII levels only we have no war). Individuals and corporates are pretty levered up. When the Fed tried to modestly increase rates and taper QE, the markets went nuts in the Q4 of 2018 forcing the Fed to change course. To me, it seems like this massive amount of debt has only been sustainable because of very low interest rates. Once rates go up, it's like a house of cards that falls. I have heard how inflation can inflate away some of this debt - but I am trying to picture it.
Not being feasible is the concern. But, interest rates, particularly long term interest rates, are determined by market forces.

Demand for loan from borrowers and supply of loans from lenders. Lenders will supply less loans if they expect inflation that is higher than the rate they change.

Yes, in recent decades the Fed has had considerable control over rates. The Fed's comments on inflation have been widely viewed as credible. This is hugely important.

But what happens if inflation is NOT transitory after Powell claims so strongly that it is. Will lenders be spooked and only lend out at higher rates? At that point of time, further quantitative easing will be widely unsupported by markets as it will only worsen inflation. It will be against part of the Fed's dual mandate which dictates that they fight inflation. The way they do that is to tighten -- not further easing.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by watchnerd »

steve r wrote: Wed May 19, 2021 5:34 pm But what happens if inflation is NOT transitory after Powell claims so strongly that it is. Will lenders be spooked and only lend out at higher rates? At that point of time, further quantitative easing will be widely unsupported by markets as it will only worsen inflation. It will be against part of the Fed's dual mandate which dictates that they fight inflation. The way they do that is to tighten -- not further easing.
I think Powell has been pretty clear that he's willing to let inflation run hot for a little bit, and then decide what to do about it, presumably by tightening.

This won't come as a shock to the financial markets.

Unless 'running hot' becomes 'running too hot', i.e. well above the 3% range longer term that Powell has mentioned.

Of course, if rates tighten, it's reasonable to expect stock valuation contraction based on simple DCF modeling.
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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Robot Monster »

Dear people of the future,

Here we have Siegel predicting higher inflation, and on the flip side, "Ark's Cathie Wood argues that the U.S. is set up for 'massive' deflation, with the recent correction in commodities prices providing a signal for what's to come."link So, how did it play out?

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Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by watchnerd »

Robot Monster wrote: Thu May 20, 2021 12:21 pm Dear people of the future,

Here we have Siegel predicting higher inflation, and on the flip side, "Ark's Cathie Wood argues that the U.S. is set up for 'massive' deflation, with the recent correction in commodities prices providing a signal for what's to come."link So, how did it play out?

Love,
A robot of the past

CPI-U is a trailing indicator.

Commodities futures are leading indicator.

But....

How much of a services economy is impacted by commodities as opposed to wages?
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Gaston
Posts: 112
Joined: Wed Aug 21, 2013 7:12 pm

Re: Inflation could be 20% in the next three years: Wharton's Jeremy Siegel

Post by Gaston »

Inflation “could be” X% in the next three years. Pick whatever value you wish for X, and your prediction will be just as good as Mr Siegel’s.
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