Let’s talk about soft landing

[kartel]

Let’s talk about soft landing. I know this is controversial. But let me explain.

Fed will stop increasing interest rates at one point. The economy will simmer down or have a massive volatile correction.

In a case of the volatile correction, fed will drastically lower the interest rates and pump up the economy. I’d assume it will be similar to 2008. I do think we know the playbook.

In a case of soft landing, I’m curious to know how fed adjust the interest rates.
Is it going to lower 25 base points at a time?
Let’s say that we are ‘stuck’ at 2.8 YoY inflation. What does fed will do?

In a nutshell, what’s fed’s playbook for soft landing?

I’d love to hear your perspectives.
Thanks!

 

[wes40]

@kartel Assuming interest rates are too high right now is the wrong move.

Inflation rates have been knee jerk skyrocketing because they were too high for too long. The rate interest rates "should" be is not 0.

If it goes down, it probably won't be too far and it probably will happen slowly. At least if there are sane people at the top, rather than politicians.

If things stay permanently at 2.8% inflation, Fed will probably not make any changes.

 

[resjudicata]

@kartel My thoughts:

3% annual inflation is fine if we get ~2% annual GDP growth and unemployment stays below 4%. Don't know what the other commenter means about stagflation, that requires high unemployment.

 

[rollo22]

@resjudicata I think the other commentor is throwing out a bunch of buzz words, but doesn't actually understand wtf they are saying.

Common these days.

 

[resjudicata]

@rollo22 Yeah. Nobody researches anything.

 

[masako]

@resjudicata Where are you finding 4% unemployment figures?

 

[resjudicata]

@masako Re-read my comment, I said below 4%

 

[masako]

@resjudicata LOL. Ok. Where are you finding unemployment figures *below* 4%?

 

[resjudicata]

@masako https://www.bls.gov/cps/

 

[masako]

@resjudicata Oh. OK. Enjoy!

 

[corbco]

@kartel There will be another recession -- there's always going to be another recession -- the only question is when. For a couple of years now it's been "6-9 months away". I'm sure there are people who have been holding their breath for that long, just waiting to say, "I told you so!!"

My perspective: We are ALREADY coasting through a soft landing -- "So far, so good". We might not make it all the way to the final state, but so far, the hand on the economic throttle is doing a pretty darn good job; and further, the nearest pullback is STILL felt to be 6-9 months away -- 2Q24.

Let's not forget that having interest rates where they currently are, gives us lots of "ammo" to fight the next pullback, too -- if needed, we can cut rates 25 or 50 bps at a time for a LONG time before we run out of runway.

The best possible news out of The Fed right now would be that they decide to skip the next rate increase again. Since they can't do 12½bps rate hikes, doing 25bps every -other- meeting is the next best thing.

And when the next correction gets here, be it early 2024 or late 2026, someone will still say, "I told you so!!"

 

[masako]

@corbco Did you really expect this degree of QE, though? We should’ve legitimately had a major correction already. Printing our way out of it has “worked” for quite a while.

Paul Volcker would not be impressed. Nor surprised.

 

[chantelle24]

@kartel I’d recommend checking out CME’s Fedwatch Tool. It gives the current forward looking rate expectations and can be a sentiment gauge for the markets. They change intraday and are by no means certain but when developing a game plan for the markets on a 1-2 year basis.

My two cents, the Fixed Income markets are providing better risk adjusted return opportunities over the next 1-2 years than equities. Assuming some degree of rate cuts happening and an intermediate duration portfolio you’d be looking at near 5% yields and possibility for between 5-10% price return over the next 18 months. That assumes somewhere between 150-200 BPS on rate cuts on a 6 duration portfolio. Total return in fixed income space would be ~18% if that played out and significantly lower standard deviation relative to equities. My best idea by far at the moment without getting to active and/or tactical.

 

[ranaelm]

@kartel What they define as soft landing, is in my belief, delaying the inevitable ‘credit crunch’, and mass defaults. Smaller Banks are already being exposed.

There will be, at some point, a time to pay for record low interest rates for no logical reason. The housing market is completely whacked rn (owners in long term deals at lows rates, unwilling or unable to move. So supply is heavily constrained).

Car prices and loan rates are bananas, credit card and debt defaults on the rise. There will be a breaking point and the dominos will fall.

Stagnant wages at the bottom end of earners and increased cost pressures from all sides, debt is no longer cheap, and if you already had debt, you’re stuck.

Student loans about to suck the life out of discretionary spending, and more defaults to come from that.

These issues can’t be ignored, and the price of cheap debt, stagnant lower end wages and inflationary pressures will eventually come to a head.

(That’s unless someone steps in and actually addresses the problems, but the gov is more interested in what sports kids are allowed to participate in…)

And we’re not even touching on National debt (which is going to become more expensive with credit worthiness update on the US)

I’m generally confident in long term, and my investment timeline is 20-30 years, but at some point, there needs to be a reset button.

 

[christinas]

@kartel Soft landing is a myth. We hear stories about it every recession, but has never been seen before. Economy crashes everytime and people are surprised.

 

[rmb60]

@kartel Soft landing would prob look closer to a longer lasting period of stagflation and market sidewaysness.

 

[living4christ]

@rmb60 I’m going to need you to define stagflation and market sidewaysness. I’m sure those words don’t mean what you think they mean.

 

[lygimom]

@kartel rates should stay north of 5% for years or decades. only lower when theres a crash then raise it as soon as theres a bull market. we should have raised it in early 2010s. were all being punished for rates having stayed low.

 

[karyn]

@kartel Sometimes I think being a day trader is less stressful than investing.

 

[idl1993]

@kartel https://www.atlantafed.org/cenfis/market-probability-tracker

This is the current estimate for how the interest rates will be cut.