One for the Weekend Economists: Inflation

[El Presidente]

US 6%  Germany 6% Spain 5.5%

Unemployment plummeting in most nations. Many are nearing levels of full employment. 

Costs rising

You would think that some of the supply chain pressures will come off in mid 22. Then again will it only start to catch up with the massive global stimulus of the past 24 months. 

Where are we heading?

Will it settle down to a comfortable realm of 3% and Governments collectively sigh with relief? or will the various market drivers be so red hot that drastic cooling via interest rates will be required?  

 

[porkchop]

Rate hike has to be inevitable because what will they do when the next catastrophe happens? There will be no remedy except a new currency...unless that is the goal?

[BEVOSREVENGE]

1 hour ago, El Presidente said:

US 6%  Germany 6% Spain 5.5%

Unemployment plummeting in most nations. Many are nearing levels of full employment. 

Costs rising

You would think that some of the supply chain pressures will come off in mid 22. Then again will it only start to catch up with the massive global stimulus of the past 24 months. 

Where are we heading?

Will it settle down to a comfortable realm of 3% and Governments collectively sigh with relief? or will the various market drivers be so red hot that drastic cooling via interest rates will be required?  

 

No need to raise rates drastically, just need to prosecute the hoarders and price collusionists.  Then like magic, inflation will erode.

 

[rcarlson]

Disaster is looming.  The most idiotic monetary and debt policies globally, ever.  Shame on those that think core, historical economic principles don't apply because there's something unique about "now."   

[PigFish]

Do you mean to say that erectile disfunction is not infrastructure??? How can that be?

Jimmy Carter, the sequel.

 

[Kitchen]

By 1980s calculations, we (in the USA) are actually at 14% inflation.  Insofar as the unemployment rate coming down, that is really due to people dropping out of the workforce, which is not taken into account in the actual unemployment number.  This is almost certainly due (in the USA) to an increase in welfare like policies.  And, with out more coming back into the workforce, eventually economic growth will falter but inflation, because it is being fed by the governments, will continue.  Not to mention, government still cant manage to get out of their way even with a mild variant and still want to keep from returning to busy as usual.  

You cant throw a 2 year long Covid party and not expect the bill to eventually come due.  Like Duh!

Either way you slice it, the economy is screwed.  

Although a rate hike would be best, and would cause a recession anyway, I dont think it is going to happen until 2025.  I really think the current powers to be are flying with binders on ignoring everything but what they want to do.  They are going for broke and bringing the rest of us with them.  

But look on the bright side, as our favorite proxy likes to say, "America is back!"  Yep, 1970s' America is back!  

 

[anacostiakat]

Just like you can't cure stupid, you can't spend your way out of an inflationary economy.  

[GolfT3]

There was never going to be a scenario where inflation wasn’t high this year given the madness of 2020. 2022 over 2021 will be much more telling. Our current thesis is that inflation will remain well above the Fed’s target next year but will be lower than the 6-7% we are seeing now. 1-2 interest rate hikes in 2022 is the most likely scenario and will be needed to help dilute the impact of fiscal stimulus still being spent by the federal government. The infrastructure bill won’t be big enough to move he needle on inflation ($100B/year), but if the other BBB bill passes that could be an issue. Too early to know as there are no finalized details on spending in that bill.

Over the last 40 years every recession has been followed by a period of high inflation and then a period of slow to no growth, I don’t see why this scenario should be any different.

On the employment front, I’m no big fan of increased or unneeded welfare programs but that’s not why labor force participation is down. Zero evidence to support that conclusion. Statistically, the two groups who left labor force in the greatest numbers in 2020 and have recovered the least by the end of 2022 are workers over the age of 55 and women. Women have started rejoining the labor force at greater rates over the last few months (likely because schools/daycare/etc are more widely open now), over 55 have not. A lot of those workers have likely decided to go part time or retire while their savings and 401k look strong in a bullish stock market environment. Lower labor force participation will continue to drive wage growth in 2022. Not an inherently bad thing as a number of entry wages have been stagnant when inflation adjusted for the last 20-30 years.

Long-winded way to say, people love to play chicken little but the sky usually isn’t falling.

[SCgarman]

5 hours ago, PigFish said:

Do you mean to say that erectile disfunction is not infrastructure??? How can that be?

Jimmy Carter, the sequel.

 

This is far worse my friend, far worse. Carter can now celebrate he is no longer the worst POTUS in history.

[SigmundChurchill]

So, with all these different theories coming from every angle, the answer to where you put your money right now is as illusive as ever.

I have been trying to figure it out.  Some people say rental properties, because interest rAtes are still low and rent can be raised often enough to keep up with inflation.

Precious metals are not linear, and crypto scares the hell out of me.  The market will take a hit, or at least stagnate if rates go up even a little.  So what’s the answer?

[Corylax18]

If you believe real inflation is only at 6-8% than you are extremely Naïve, to put it politely. I'm in the middle of trying to build out the ground network for my company's next generation of satellites, my costs have nearly DOUBLED in the last 18 months, Maybe 6-8% a month, per month, for the last 18. But year on year, we're easily double the bullshit the feds been telling us. I had 8 full time crews 18 months ago, I'm struggling to keep 6 running right now, despite increasing the pay and benefits we're offering significantly, wages do appear to be rising, at least for the bottom end of market, which I take as the only real silver lining here. Plate steel prices more than doubled schedule 80 3" PVC conduit has tripled in price, if you can find it, but nothing has gotten cheaper or easier to find. Nothing. 

The US Fed should have started tapering during the Obama administration, they blew it. Then Trump should have started tapering the second he got into office, they blew it. Instead, both dipshits sacrificed the long term stability of our economy to boost their ratings in the short term. There where very few "bullets" left by the time this pandemic hit because we (as a collective group, all of us) had been acting like stupid children for 3-5 years before this. As other have said, there is no reason to believe this bubble wont burst, just like everyone before it has. But add on the Debt issues China is finally being forced to confront and we could have some major issues over the next 3-10 years. 

[Corylax18]

1 minute ago, SigmundChurchill said:

So, with all these different theories coming from every angle, the answer to where you put your money right now is as illusive as ever.

I have been trying to figure it out.  Some people say rental properties, because interest rAtes are still low and rent can be raised often enough to keep up with inflation.

Precious metals are not linear, and crypto scares the hell out of me.  The market will take a hit, or at least stagnate if rates go up even a little.  So what’s the answer?

The market is going to collapse, we've seen 40-100% increases in stock prices while those companies earnings/revenue stagnated. Its all build on funny money, way to much of it. Another inflationary indicator. The DJI's TRUE valuation today is 20-35% less than it was in February 20(depending on what metric you use, none of them are positive though), but its trading for 40% more than it was then. That tells me we have room to fall at least 60% to get back to a "fair" valuation. I still have way too much money in the stock market right now, I haven't decided what to do with it when the cards start to fall, but I'm definitely not staying on the ride for that drop. 

[SigmundChurchill]

3 minutes ago, Corylax18 said:

If you believe real inflation is only at 6-8% than you are extremely Naïve, to put it politely. I'm in the middle of trying to build out the ground network for my company's next generation of satellites, my costs have nearly DOUBLED in the last 18 months, Maybe 6-8% a month, per month, for the last 18. But year on year, we're easily double the bullshit the feds been telling us. I had 8 full time crews 18 months ago, I'm struggling to keep 6 running right now, despite increasing the pay and benefits we're offering significantly, wages do appear to be rising, at least for the bottom end of market, which I take as the only real silver lining here. Plate steel prices more than doubled schedule 80 3" PVC conduit has tripled in price, if you can find it, but nothing has gotten cheaper or easier to find. Nothing. 

The US Fed should have started tapering during the Obama administration, they blew it. Then Trump should have started tapering the second he got into office, they blew it. Instead, both dipshits sacrificed the long term stability of our economy to boost their ratings in the short term. There where very few "bullets" left by the time this pandemic hit because we (as a collective group, all of us) had been acting like stupid children for 3-5 years before this. As other have said, there is no reason to believe this bubble wont burst, just like everyone before it has. But add on the Debt issues China is finally being forced to confront and we could have some major issues over the next 3-10 years. 

I would argue that wage increases at the bottom end of the market give a worse outlook for inflation.  Inflation starts at the bottom and works it’s way up.  The people at the bottom spend all their cash.  If the price of Ferraris and Lanceros goes up, the overall economic picture changes little, but when the price of milk and eggs go up, you have a problem.

[GolfT3]

For me, naive would be extrapolating anecdotal personal experience to diagnose the entirety of the largest economy in the world but what do I know…

@SigmundChurchill apartments and utilities are generally very good inflation hedges because of their ability to reprice frequently and demand that is insulated from the rest of the economy (people always need housing and power regardless of how good or bad the economy is). Real estate will also give you some tax advantages but that’s a different conversation.  A short duration bond portfolio can help hedge against a stock market correction but with rates this low I’d stay far away from a medium to long duration portfolio. I generally agree with you on commodities and crypto, they are non-correlated assets but also extremely speculative. Lots of people are adding some exposure there but not as a significant percentage of a total portfolio. I would also say that having a good amount of cash on hand is always a strong play when a correction might be coming. People who were able to deploy cash in the first half of 2020 have done extremely well, we might have another opportunity like that on the horizon.

[SigmundChurchill]

11 minutes ago, GolfT3 said:

For me, naive would be extrapolating anecdotal personal experience to diagnose the entirety of the largest economy in the world but what do I know…

@SigmundChurchill apartments and utilities are generally very good inflation hedges because of their ability to reprice frequently and demand that is insulated from the rest of the economy (people always need housing and power regardless of how good or bad the economy is). Real estate will also give you some tax advantages but that’s a different conversation.  A short duration bond portfolio can help hedge against a stock market correction but with rates this low I’d stay far away from a medium to long duration portfolio. I generally agree with you on commodities and crypto, they are non-correlated assets but also extremely speculative. Lots of people are adding some exposure there but not as a significant percentage of a total portfolio. I would also say that having a good amount of cash on hand is always a strong play when a correction might be coming. People who were able to deploy cash in the first half of 2020 have done extremely well, we might have another opportunity like that on the horizon.

Thank you.  I have been searching for possible properties, but wondering about the urgency with interest rates.  At the same time, with $27 T in debt, how much can we realistically raise them?

[GolfT3]

14 minutes ago, SigmundChurchill said:

Thank you.  I have been searching for possible properties, but wondering about the urgency with interest rates.  At the same time, with $27 T in debt, how much can we realistically raise them?

I agree that rates are unlikely to go up dramatically in the short term and when they do start going up lenders will likely absorb some of that increase in their spreads. The important thing in that type of real estate investment is that rental rates are growing faster than interest rates. As long as you have a long-term perspective and don’t go crazy on leverage you should be ok. Being patient and getting the right property is always going to be more important than trying to save 10-15bps on interest rates.

[Bijan]

2 hours ago, anacostiakat said:

Just like you can't cure stupid, you can't spend your way out of an inflationary economy.  

 

[PigFish]

On the properties front, be sure you can handle the debt service. If you can't, don't do it.

We are in a new paradigm where governments want to control everything and blame it on Covid. A lot of smaller RE investors have died (rhetorically) due to laws that have made housing people at the expense of the property owner the norm. If you cannot boot a tenant for not paying, covid of course, then many won't pay! 

The point I am making is this. You cannot rule out government intervention in your plan. If you cannot hold it and wait out a trend away from socialism and crony capitalism, you may lose it.

Cheers! -Piggy

[SigmundChurchill]

15 minutes ago, PigFish said:

On the properties front, be sure you can handle the debt service. If you can't, don't do it.

We are in a new paradigm where governments want to control everything and blame it on Covid. A lot of smaller RE investors have died (rhetorically) due to laws that have made housing people at the expense of the property owner the norm. If you cannot boot a tenant for not paying, covid of course, then many won't pay! 

The point I am making is this. You cannot rule out government intervention in your plan. If you cannot hold it and wait out a trend away from socialism and crony capitalism, you may lose it.

Cheers! -Piggy

Thank you.  You are 100% correct, as I am painfully aware.  We already have several rental properties that are just getting back to full rent in recent months.

[joeypots]

3 hours ago, SigmundChurchill said:

I would argue that wage increases at the bottom end of the market give a worse outlook for inflation.  Inflation starts at the bottom and works it’s way up.  The people at the bottom spend all their cash.  If the price of Ferraris and Lanceros goes up, the overall economic picture changes little, but when the price of milk and eggs go up, you have a problem.

May be that's a reason that the price of food isn't included in the calculation of inflation in the USA.

 

[SCgarman]

4 hours ago, SigmundChurchill said:

I would argue that wage increases at the bottom end of the market give a worse outlook for inflation.  Inflation starts at the bottom and works it’s way up.  The people at the bottom spend all their cash.  If the price of Ferraris and Lanceros goes up, the overall economic picture changes little, but when the price of milk and eggs go up, you have a problem.

Not to mention the price of all fuels. Fuels for vehicles and for heating the house in the cold winters. I pray the US has a mild winter, especially for those in harsh parts of the country who live check to check.

[porkchop]

17 hours ago, rcarlson said:

Disaster is looming.  The most idiotic monetary and debt policies globally, ever.  Shame on those that think core, historical economic principles don't apply because there's something unique about "now."   

There is something unique about now - superpowers cannot go to war, at least not in the traditional sense. Without war or printing growth is hard to find. That’s why we are seeing the creation of digital worlds that can be built and sold from the ground up. 

 

5 hours ago, SigmundChurchill said:

So, with all these different theories coming from every angle, the answer to where you put your money right now is as illusive as ever.

Uruguay is supposedly 1950’s USA. 

[SigmundChurchill]

2 hours ago, joeypots said:

May be that's a reason that the price of food isn't included in the calculation of inflation in the USA.

 

Strange, isn't it?  Two of the major necessities in life, food and fuel, are not counted in the core inflation numbers because they are "too unstable".  I never really bought into it.  I think leaving them out is the only way we were able keep the numbers down to 2-3% for so long.

But the point I was making was that poor people buy necessities, and when the price of necessities go up, it is a much stronger sign of inflation than when the price of luxury items go up.  Plus, if we are paying the McDonald's clerk $18 an hour, then the office worker that is making $20 an hour is going to demand a raise, and so on, and so on.  The guys driving the trucks are going to be asking for more money, and so are the guys loading and unloading the trucks, etc.  And with all of these people making more money, the price of the goods they produce, transport, sell, etc, has to go up too, in order to pay them the extra money.  Then they are making more money, so they can afford to buy the goods at a higher price, so the price goes up some more.  It is a vicious cycle.

The only way to stop it is to stop buying the goods, either out of principal or out of necessity.  Or raise interest rates which removes money from circulation.  I remember growing up in the 80s when everyone was buying 10 year bonds at like 13 or 14 percent.  You weren't going to get a return like that on the market.  But we are not in a position to do that now.  We have to service 27 Trillion dollars.

 

[Cairo]

18 hours ago, rcarlson said:

there's something unique about "now."   

What is unique about now is that when this thing crashes the whole world gets clobbered together.

That is also my view about investment classes--I think they will all crash together, though timing is way above my pay grade.

There are no more safe harbors imho.

[Nevrknow]

1 hour ago, porkchop said:

Uruguay is supposedly 1950’s USA. 

The good old days. When 1 man with an average job could afford a house , a car and raise 2 kids with his wife at home. 
 But when you have people hell bent on having more than the next guy who wind up screwing over Joe plumber, we get to where we are now.