Diving, its an olympic sport
not something consumer sentiment should do
The University of Michigan’s preliminary consumer sentiment for the US dove to 70.2 in August. The previous month was posted at 81.2. This is the lowest reading since December 2011. It is even lower than the beginning of 2020 when the government shutdown the economy.
Consumer’s inflation expectations stayed steady at 4.6%. This is what consumers believe inflation will be over the next year. It has broken out of the 2%-3% range it had been in for the past 6 years.
It has been over a decade since inflation expectations were this high.
The more consumers fear price inflation, the more they will spend now to get ahead of the inflation. Consumers are sitting on a massive stockpile of money that can enter the economy almost immediately.
By my estimate, banks are sitting on $3 trillion in excess funds. This is stimulus money that consumers parked at their bank. Banks don’t know how to put it to work, so they’ve been using the reverse repo facility (RRP) at the Fed to earn a 0.05% return. Something I’m keeping my eye on is the overnight repurchase facility. This is the opposite of the RRP. Banks would use this facility to trade collateral (like short dated treasuries) to the Fed in exchange for cash. Once consumers start to spend, the banks will need to withdraw the funds they lent to the Fed through the RRP.
This will signal to me that the great inflation will have begun. It means nothing to have had high CPI, PPI, PCE, and money supply numbers if the masses don’t recognize it and react. Once the Fed’s transitory charm has worn off, it will take very high interest rates to knock inflation back down. I would not be surprised to see a panic happen where there is a rush to safe assets such as treasuries and the dollar. This would push the price of gold down further. In a recent article by James Rickards, he posited that we may be in the early stages of a financial panic caused by a shortage of high quality dollar collateral. He goes on to say:
In a crisis, gold initially drops as weak hands sell to raise cash to meet collateral calls on losing positions. Then the strong hands emerge and bid up the price of gold as the ultimate safe haven.
Today’s calm market is the best time to acquire gold in preparation for what could be a tumultuous fall and winter to come.
I am still of the mind that this fall will be a wild one. It’s time to prepare. Winter is coming.
"Once consumers start to spend, the banks will need to withdraw the funds they lent to the Fed through the RRP. " why is this true? so I spend money but thats just moving money around accounts in the banking system. The money is excess for the banks as they have no offsetting loan, its base money.
surely the reason the banks put the money with the fed is because its surplus to capital requirements.
However, I am just asking, I don't know. So my question is withdraw the funds, fine, but what do with the funds? I mean collectively its either in the banking system or with the fed.
Any expansion appreciated!
When you say you think "this fall will be a wild one" are you referring to gold?
If so, I'm tempted to take profits from RW's recommendations. And then get back in after 30 days. But he's also always made the point things can move fast.