Scattered Thoughts on March CPI, Interest Rates, and Housing

How can our thoughts not be scattered these days.

I continue to think that the temptation is to focus on the detailed short-term effects of the various real shocks the Trump administration is dangling arbitrarily over the economy, but that proper long-term focus is to have faith that an economy that is being taunted with arbitrary real shocks will perform poorly, and that all the macro-level trends that coincide with a poorly performing economy will eventually play out.

For instance, the yield curve has steepened significantly. Long-term yields are nearly as high as they were on inauguration day while short-term yields have declined - presumably foretelling Fed stimulus in response to the tariff shock. I’ve seen debates about whether this is a devolution of the US treasury market that now requires a risk premium. I even opined on a similar idea last month. Maybe. I’m also seeing assertions that high yields are related to a flight from the dollar, margin calls, hedge fund asset rebalancing, etc.

International capital flows are really complicated. My general point of view on the trade deficit is that American firms earn a lot of profits from foreign operations and we use those profits to buy imports. Reinvested foreign profits aren’t measured as cross-border capital flows, so the persistent trade deficit and inflow of foreign capital is mostly just a measurement problem. It seems unsustainable because those reports don’t account for American holdings of foreign productive capital, which have been growing and self-funding for decades.

So, what happens if we block the avenue for purchasing imports with our foreign profits? It’s making my brain hurt. I usually play the know-it-all about everything, but honestly, I don’t feel confident enough about my understanding of international capital flows to write anything.

On the other hand, the interruption of supply chains, the loss of trust among trading partners, the loss of income from a decline in foreign visitors to the US, etc. all will lower real GDP growth for the foreseeable future. And, even if Trump reverses every declaration he has made, some of those effects will remain.

So, I continue to have resolve that a long bond position is the simple-minded investor’s hedge here.

The rest of the scattered thoughts are below.