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Easy monetary policies by the US Federal Reserve have played a role in reviving price inflation. It hits the wallets of ordinary Americans. Those policies also pumped up asset inflation, which increased the savings of those on the other end of the pay scale.
The average household is obsessively following recent announcements from the US Consumer Price Index. It recently clocked annualized inflation at 6.2 percent, the highest reading in 30 years. Petrol prices in particular have risen. Jay Powell, the recently re-appointed chairman of the Fed, is facing increasing pressure to sharpen monetary policy quickly and sharply before inflation gets out of control.
In addition to stifling the price increases of everyday goods and services, higher interest rates should also let the bubble bubble in risk assets that have inflated one percent.
The market capitalization of the recently listed electric truck manufacturer Rivian has hit more than $ 100 billion, despite the fact that only relatively few vehicles were mounted. The net present value of companies like these, whose profits so far are far, should suffer badly if discount rates rise even slightly. This, of course, assumes that traditional valuation techniques still apply.
And then there are those assets that do not shed consistent cash flow. Divorced New York City couple, Harry and Linda Macklowe, just sold 35 pieces of their award-winning art collection for $ 676 million, well ahead of the $ 400 million estimated by auction house Sotheby’s. In today’s hot art market, a Basquiat priced at $ 400,000 in 1998 now changes hands for $ 40 million.
But it’s old economy good. A package of physical, digital and non-interchangeable data – unique and non-interchangeable data units – works from the trendy digital artist Beeple only went to auction for $ 25 million.
Speaking of older works, hedge fund billionaire Ken Griffin bought a rare copy of the US Constitution late last week. The auction attracted attention after a DAO – a decentralized group of cryptocurrency mavens – tried in vain to pool their resources to win the artifact.
Once, professional sports teams offered the experts a place to park wealth. Asset price inflation for these also continues unabated. In a partial sale earlier this year, the Sacramento Kings, a small market pro basketball franchise, was valued at $ 1.8 billion. Just eight years ago, control of it was bought for $ 530 million.
In Manhattan, it also does not get cheaper to just find a place to show your art (at least the physical pieces). The number of apartments sold in Manhattan more than $ 4 million in the third quarter not only increased from last year, but more than doubled from the same period in 2019, according to research firm Miller Samuels.
However, rising asset values have meant more business for investment banks. According to New York State data, bonuses at Wall Street brokerage dealers will break the post-financial crisis record set in 2017. Last year’s average payout to securities workers was $ 184,000. These figures do not cover those in the even more lucrative hedge fund and private capital arena, whose abundance should conveniently exceed that number.
Economists have wondered to what extent loose money since 2009, designed to avoid economic recession, has caused even more gaping incomes and wealth inequality. Nevertheless, much stricter monetary conditions will surely cause suffering at the bottom of the wealth pyramid, a point that those who cried for higher rates rarely recognize.
One can only hope that the US economy no longer needs the Fed’s continued paternalistic financial support. An economically soft landing can bring a much-needed common sense to asset prices of all kinds, the real and the virtual.
Have a nice rest of your week.
Lex American Editor
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