Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

US interest goes up, others go down

Early 2022, China urged the West not to raise interest levels as countries (read: China) were still recovering from Covid-19 (eg, Barron’s, CNN). Since March, the Fed has warned markets that it may raise US interest by even 0.5%. The impact is clear: money is fleeing China. Euro, Pound and Yen are near historic lows.

The Fed does not have much choice as inflation in USA is even higher than in Europe. The ECB is only considering its timing when to stop buying European government bonds. Their efforts are directed at keeping interest low despite high European inflation. Essentially, Europeans are getting poorer day by day.

There’s an interesting side effect of fleeing Chinese capital: it creates American leverage on the (alleged) Chinese support for the Russian invasion of Ukraine. China cannot afford huge capital outflows in their (already) faltering economy (eg, energy disruptions, factory lockdowns, real estate bankruptcies).

Weaponizing the US dollar is nothing new. Back in 1971, John Connally, then US Secretary of the Treasury, made the famous comment: “The Dollar is our currency, but it is your problem“ (eg, IPE).

Early July 2019, I published my blog the inflation conundrum, including my diagram to the left.

Some people claim that money supply by Central Banks is unrelated to our current high inflation (eg, FD-2022). As usual, the devil is in the details.

Most of the increase in money supply translated in higher asset prices (eg, bonds, real estate, shares). Hence, technically speaking, this price inflation was an (accounting) profit.

The consumer price index (CPI) does not reflect real estate prices; only actual rents (eg, source).

Hence, the CPI ignores that higher housing prices translate in smaller (grocery) shopping budgets.

In my view, increased money supply and a higher CPI are related, albeit with a delay in time.

Given my diagram above, I’m still a little skeptic if higher interest levels can actually “combat” consumer price inflation. Most of the tightening money supply will – again – translate in lower asset prices (eg, bonds, real estate, shares). To date, most of these losses have occurred in bonds (eg, Morningstar-2022).

All over the world, real estate prices are (slowly) declining, which makes perfect sense because interest levels are increasing but salaries are not. Hence, consumer budgets are suffering.

In general, share prices are still doing remarkably well despite increased market volatility (eg, China, Ukraine). The slightest bit of unexpected news can cause a crash. Example: Netflix reported a slight decrease in its subscriptions and its share price crashed by about 45% within a few days (eg, Yahoo Finance).

The song below expresses my current feelings well.

High Hopes (2018) by Panic! At the Disco
artists, lyrics, video, Wiki-band, Wiki-song

Note: all markings (bolditalicunderlining) by LO unless in quotes or stated otherwise.


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