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“Macro” Musings II


JEast
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As the ¥en approaches the USD/JPY of 110, I believe we have entered a new phase.  A new chapter in the sense, that (though they should) other Asian countries will not just sit by and do nothing.  They too will start to join the fight to keep exports up and start exporting non-inflationary impulses across the seas with their currency lowering efforts.

 

I know and not to insult, but the whippersnappers are sure to say I see inflation all over the place.  You are probably correct from an individual perspective, but not in the fullness of the aggregate. Your extra 5¢ on tomatoes does not compare to Boeing lowering a $300m plane by 5%, or Nissan lowering their retail prices by 7%.

 

Anyway, just thought it time for a new thread on the macro drama.

 

 

Cheers

JEast

 

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Everyone fears inflation, which means deflation is likely just around the corner....... As other countries in Asia and the EU all race to depreciate their currency the impulse will be deflation - at least for now. Everyone points to the "printing" by central banks as proof that inflation is coming but they fail to realize that the banks are just sitting on those reserves, that's why the ECB had to go to negative deposit rates - to try and force the banks to do something else with their money besides deposit it with the ECB.  My gosh, could that deflation hedge of Prem's payoff??  :o

 

 

cheers

Zorro

 

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Looks like the USD will get stronger and stronger. This will have an impact on US exports and on earnings of nearly every S&P company (margin mean reversion finally kicking in?).  I am really interested in the next quarter of earnings results. When this continues without the FED also printing money the US will get deflation in the near term. Cheap energy will probably aid this process.

 

When the FED starts printing again because it has no choice, we will see massive inflation but this is probably some years away.

 

Macro is really interesting but it sucks a whole lot of time thinking about how the world will implode someday.

 

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I love looking at the macro picture.  I know this board has had an aversion to looking at the macro picture because it's too distracting and not helpful to value investors, but I beg to differ.  I think if one couples that with being value oriented, one could have avoided the last two bubbles.  One could also have gotten in near the bottom to ride the next bubble.  It's also why I like Prem as an investor.  Although, sometimes, he makes incorrect macro plays (like recently with his past five years of staying out of the equity markets).  But, to be fair, he also makes some really bad value plays as well (Blackberry is a value trap, I think). 

 

Anyways, I wouldn't read into the USD/JPY rate too much.  I think it has something to do with the Yen carry trade.  Besides, even during Japan's economic malaise and the US's strong economy, the JPY strengthened drastically against the dollar.  I think the yen carry trade is back on, and not just because people think the US interest rates will rise, but because global rates are rising. 

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I wouldn't read into the USD/JPY rate too much.

 

Maybe one should not read too much into the USD/JPY rate too much, but what about the Baht, Ringgit, Rupiah, and AUD since September 1st.  I do not believe these currencies are used in the carry trade.

 

On the other side of the pond, latest inflation data out.

 

http://i62.tinypic.com/vhco4p.png

 

Ref: http://www.zerohedge.com/news/2014-09-30/eurozone-inflation-drops-fresh-5-year-low-eurusd-tumbles

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Inflation is  unlikely.

 

Productivity is going up like crazy. Entire industries are being almost fully automated. This makes stuff cheaper.

 

Unemployment likely to stay high for the next few decades. So fewer people spending.

 

Prices of commodities will come down. There are people saying oil and gas go up, but I disagree. I think within 20 years, almost half the planet will be on solar energy. And battery cars will be big. So energy prices will come down. Young people buying less cars etc. The world will become a lot more efficient over the next few decades. This was also the reason you did not see inflation in the economic boom in the 90's.

 

So to see serious inflation the fed would need to print crazy amounts of dollars. I don't think the fed will do that. Especialy not with higher unemployment. That would hurt the economy.

 

I think as the fed you need to balance how much tax revenue you get and how much cheaper US| debt will become?

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Here is something we value folks do not pay very much attention to, 5-year forward looking inflation swap expectations -- but interesting.  Roughly stated, for the last 10 years the US break-even point was about 300bp. 

 

http://i61.tinypic.com/30vfy15.png

 

In Europe last week, the break-even was below 200bp and dropping.  Meaning the consensus is now predicting year/year inflation to be very low indeed.

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I think the consensus is going to be wrong.  YOY thin air credit expansion (as measured by adj. loans, leases, securities, and cash assests) have consistently been up a full 110 basis points over the long run median average since 2013.  That, along with a host of other reasonings I'm just not willing to write down at the moment, will lead to higher inflation.  Although, I agree with Milton Friedman's view that this higher inflation is laggy and quite variable.  But, I think in 2016, we will start seeing much higher inflation.  I'm talking about 5-6% YOY inflation.  This will be enough to get the Fed's ass in gear and start driving higher interest rates. 

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Although, I agree with Milton Friedman's view that this higher inflation is laggy and quite variable.  But, I think in 2016, we will start seeing much higher inflation.  I'm talking about 5-6% YOY inflation.  This will be enough to get the Fed's ass in gear and start driving higher interest rates.

 

Milton Friedman would also say money has been way too tight.

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The counterargument is the money supply skyrocketed in the 1800s but there was deflation due to the surpluses of goods, services and labor.  The inflation in the 20th century was caused by shortages of goods, services and labor.  I just do not see absent a war or epidemic how the current goods, service and labor go from a surplus to shortage.  What the central banks have been doing is flooding the market to prevent nominal deflation but not real deflation.

 

Packer

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The counterargument is the money supply skyrocketed in the 1800s but there was deflation due to the surpluses of goods, services and labor.  The inflation in the 20th century was caused by shortages of goods, services and labor.  I just do not see absent a war or epidemic how the current goods, service and labor go from a surplus to shortage.  What the central banks have been doing is flooding the market to prevent nominal deflation but not real deflation.

 

Packer

 

I view inflation as being strictly a monetary phenomenon rather than a supply problem.  Therein lies our differences in view.

 

Anyways, we'll see.  I'm betting on higher than normal inflation going forward.  My thesis is that this will pressure Feds to raise interest rates even more, thereby compressing profit margins.  Rising prices will also stem consumer demand creating catch-22 situations for corporations, which will then balance out whatever pricing power they had with these increased prices.  In sum, earning multiples will contract and cause PE multiples in the market to rise, making an overvalued market even more overvalued. 

 

Again, we'll see.

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What evidence do you have that inflation will occur when you have excess of goods, services and labor in reserve currency economy?  I cannot find one.  Inflation in the US and UK before the US occurred when we had shortages of one or all of these items even though we were a reserve currency economy.

 

Packer

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I view inflation as being strictly a monetary phenomenon rather than a supply problem.  Therein lies our differences in view.

 

 

China accounted for 40% of world money creation 2009-12.  Since 2012, PPI has fallen for 31 consecutive months.

 

Not saying you're wrong, but I'm not sure that monetary inflation necessarily ends up in PPI or CPI.  It ends up in assets.

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I view inflation as being strictly a monetary phenomenon rather than a supply problem.  Therein lies our differences in view.

 

 

China accounted for 40% of world money creation 2009-12.  Since 2012, PPI has fallen for 31 consecutive months.

 

Not saying you're wrong, but I'm not sure that monetary inflation necessarily ends up in PPI or CPI.  It ends up in assets.

 

The end of a debt super-cycle is reached in two ways that I know of: deflation or hyper-inflation. Anything else just kicks the can down the road.

 

The debt super-cycle we have lived through until now is the largest accumulation of debt in human history. Therefore, it is only logical that its consequences will be at least as extreme as in the past.

 

Imo the question here is not if inflation is a monetary phenomenon, the question is if hyper-inflation is a monetary phenomenon… And the answer is: yes, surely!

 

Those people who will be in charge of monetary policies in western developed countries might have only two choices in the near future: either accept a deflationary scenario, or destroy paper currencies.

 

After all that’s what Von Mises said, isn’t it? No need to invent anything new. I don’t think they will decide to render paper currency totally worthless, and that’s why I think a deflationary scare might be the most likely outcome.

 

Gio

 

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I view inflation as being strictly a monetary phenomenon rather than a supply problem.  Therein lies our differences in view.

 

 

China accounted for 40% of world money creation 2009-12.  Since 2012, PPI has fallen for 31 consecutive months.

 

Not saying you're wrong, but I'm not sure that monetary inflation necessarily ends up in PPI or CPI.  It ends up in assets.

 

The end of a debt super-cycle is reached in two ways that I know of: deflation or hyper-inflation. Anything else just kicks the can down the road.

 

The debt super-cycle we have lived through until now is the largest accumulation of debt in human history. Therefore, it is only logical that its consequences will be at least as extreme as in the past.

 

Imo the question here is not if inflation is a monetary phenomenon, the question is if hyper-inflation is a monetary phenomenon… And the answer is: yes, surely!

 

Those people who will be in charge of monetary policies in western developed countries might have only two choices in the near future: either accept a deflationary scenario, or destroy paper currencies.

 

After all that’s what Von Mises said, isn’t it? No need to invent anything new. I don’t think they will decide to render paper currency totally worthless, and that’s why I think a deflationary scare might be the most likely outcome.

 

Gio

 

For me I keep coming back to something Sam Mitchell said at a dinner before the 2009 Fairfax AGM.  Asked whether he believed in deflation or inflation he said: both, and what you need to focus on is when deflation turns into inflation.

 

Deflation scare, debase, inflation.

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For me I keep coming back to something Sam Mitchell said at a dinner before the 2009 Fairfax AGM.  Asked whether he believed in deflation or inflation he said: both, and what you need to focus on is when deflation turns into inflation.

 

Deflation scare, debase, inflation.

 

I wouldn’t presume to have any clue about what’s coming after the developed countries debt problem is finally solved… But, until it is solved I see only two possibilities: deflation or hyper-inflation.

 

Gio

 

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For me I keep coming back to something Sam Mitchell said at a dinner before the 2009 Fairfax AGM.  Asked whether he believed in deflation or inflation he said: both, and what you need to focus on is when deflation turns into inflation.

 

Deflation scare, debase, inflation.

 

I wouldn’t presume to have any clue about what’s coming after the developed countries debt problem is finally solved… But, until it is solved I see only two possibilities: deflation or hyper-inflation.

 

Gio

 

I'm not talking about afterwards, my point is that I think the solution will include both.

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