deflation bets

[muscleman]

http://s1.q4cdn.com/579586326/files/doc_financials/2016/2015-Shareholders'-Letter.pdf

 

It seems to me that commodity prices have dropped significantly since Prem initiated his delfation bets. However on page 18, they are having 50% paper losses on their deflation bets. It seems like he was roughly right about deflation but jumped onto the wrong vehicle? If he shorted commodity indexes then he would have made a killing no?

[benhacker]

If he shorted commodity indexes then he would have made a killing no?

 

They had large short positions in commodity producers... including RIO, BHP, and others.

[muscleman]

If he shorted commodity indexes then he would have made a killing no?

 

They had large short positions in commodity producers... including RIO, BHP, and others.

 

 

Thank you...... I wasn't aware of that until I read the annual report again.  :-[

I wonder why the CPI index wasn't dropping while the commodity prices collapsed. Does this also include housing prices? That seems to be the only living cost that's jumped by a lot in the past few years.

[TwoCitiesCapital]

If he shorted commodity indexes then he would have made a killing no?

 

They had large short positions in commodity producers... including RIO, BHP, and others.

 

 

Thank you...... I wasn't aware of that until I read the annual report again.  :-[

I wonder why the CPI index wasn't dropping while the commodity prices collapsed. Does this also include housing prices? That seems to be the only living cost that's jumped by a lot in the past few years.

 

We experienced disinflation because of the commodities, but housing makes up a MASSIVE portion of the index. Something like 25-30%. It basically impossible to get sustained deflation in the CPI unless if it also hits housing and rents.

[rukawa]

I wonder why the CPI index wasn't dropping while the commodity prices collapsed. Does this also include housing prices? That seems to be the only living cost that's jumped by a lot in the past few years.

 

As long as their aren't huge increases in unemployment and large reductions in consumer demand their will never be considerable deflation. Large drops in commodity prices indicate large drops in industrial demand primarily from China.

 

These things used to be linked. Before you had a situation where US workers worked at US industries which consumed commodities and produced goods demanded by those same US workers. So when US consumer demand fell, US industries would fire US workers and reduce their demands for commodities, unemployed US workers would then demand less consumer goods and so US industries would fire more US workers etc. This would often be exacerbated by industries having large debts.

 

Thus demand for commodities would thus be linked to deflation. But now that China produces a large amount of the goods that American workers consume and accounts for a large amount of commodity demand the relationship is different. Demand for commodities can now go down without US workers getting fired and thus the link between CPI (which indicates demand from US consumers) and commodities (which indicates demand from Chinese producers) is broken.

 

You can also look at this the reverse way...we had a long period of massively rising commodity prices with very little increase in CPI.

[petec]

Deflation and inflation are, ultimately, driven by the relation between how much stuff there is and how much money there is, money being created by central banks and fractional reserve banking via debt.  Fairfax bet that the amount of money in the system would fall; so far it hasn't.

 

Also worth pointing out that even Japan hasn't had much (if any) CPI deflation.  The deflation there was all in the GDP deflator measure of inflation.  So it's quite possible to have deflation in one metric but not in another. 

 

Similarly, any measure of inflation that included the cost to purchase a home or to fund a retirement would have shown massive inflation over the last 5 (and 15, and 25) years.  In fact, if this deflation bet works, it will be because the prior period has been much more inflationary than we currently think (as for example the 1920s was).

 

It will be interesting to look back in 30 years, but then it always is ;)